Eyewitness: Ingrid Melander in Brussels

New prime minister Johanna Sigurdardottir said that joining the EU and its euro currency was the best option to revive Iceland's economy, crippled by the collapse of its debt-laden banks and currency. EU officials say an application could progress swiftly, possibly allowing Iceland to join at the same time as Croatia which hopes to enter in 2011. "The key thing is fisheries. If they sign up on that one, it can go quickly," said Daniel Gros, director of the Brussels-based Centre for European Policy Studies.

But signing up to a centralised EU fisheries policy would be hard for a nation that has jealously guarded control of its seas – rich in cod, haddock, herring and other species – and waged "Cod War" disputes with Britain in the 1950s and 1970s.

Reluctance to open up its waters to others has deterred Iceland from applying to join the EU before.

The EU policy defines annual catch limits for each member country according to species and geographical area. It also sets strict rules on permitted fishing tackle and practices.

Ragnar Arnason, professor of economics at the University of Iceland, said fishermen would have to open up some of their waters to EU states, follow new quota rules, give up some of their equipment and allow much more foreign investment in the industry. The EU was also likely to oppose hunting of whales and seals. "All these are problems for Iceland and its population, especially outside of Reykjavik, where fishing is more important," Arnason said. "That would probably mean the industry would gradually go into foreign hands."

Fishing and processing of fish represents 7 per cent of Iceland's economy, according to the latest full-year data, but its political significance goes deeper. Stefan Haukur Johannesson, Iceland's ambassador to the EU, said fishing was even more important in relative terms since the collapse of the financial sector.

Willingness on Reykjavik's part to open up on this sensitive issue will depend very much on how Icelanders vote in any referendum to start EU negotiations. One European diplomat said there would be little room for compromise. "Fisheries is a common (EU] policy – the European Commission is very much in charge of it. The scope for derogations (opt-outs] is quite limited," the diplomat said.

Other possible difficulties in the talks include the fact the EU would look closely at the stability of Iceland's financial institutions and would not agree to rush any accession to the euro.

Diplomats also noted that France and Germany had said that, before enlarging further, the EU must first revive its stalled Lisbon treaty, meant to streamline its institutions and prepare the bloc to accept more members.

Johannesson said areas in which Iceland did not yet apply EU law included – apart from fisheries – agriculture, regional policy, the budget and some parts of justice and home affairs. However, it was already applying EU legislation – a requirement for membership – in about 75 per cent of its laws.

Krisztina Nagy, a European Commission spokeswoman, said talks with Iceland would be smoothed by the fact that – together with the EU, Norway and Liechtenstein – it was part of the European Economic Area, a single market with free movement of goods, services and capital. "Their homework is much more limited because it is not like some Balkan countries who need to review their judiciary system from A to Z," she said.