Iceland says creditor talks to start this week

* Iceland says talks with creditors begin this week

* Says hopes to agree on compensation as soon as possible

STOCKHOLM, June 2 (Reuters) - Iceland's finance ministry said on Tuesday the government will start formal talks with creditors of its failed commercial banks and aims to agree on compensation as soon as possible.

Financial authorities had previously expected a deal could be reached by mid-May, but negotiations have been held up due to problems valuing the assets of Kaupthing, Landsbanki and Glitnir which collapsed last year under the weight of massive debts.

"It is now hoped that the discussions will be able to be concluded in a rapid timeframe in order to finalise the capitalisation of the new banks," the ministry said in a statement.

It also said the government hoped to agree on compensation for creditors of the banks.

Restructuring and rebuilding the bank sector and repaying creditors as well as stabilising its currency, the Icelandic crown, are key parts of a $10 billion rescue programme agreed with the International Monetary Fund and Iceland's European neighbours last year.

The IMF sees the economy shrinking 10 to 11 percent in 2009 following the country's financial meltdown and the Icelandic government is forecasting it will run a deficit of nearly 13 percent of gross domestic product this year. (Reporting by Mia Shanley; Editing by David Holmes)