Iceland turns to European Commission for funds

BRUSSELS (Reuters) - Crisis-hit Iceland has formally asked the European Commission for financial help, but support from the EU executive would be small and is conditional on sorting out deposit issues between Iceland and EU members.

"This can only be done after Iceland and some EU members reach an agreement on bilateral issues related to the deposit guarantee schemes and protection of depositors," Commission spokesman Johannes Laitenberger told a regular news briefing.

Iceland is in disputes with the Netherlands and Britain over its citizens' deposits in Icelandic banks abroad.

"The Commission is confident that a resolution of this issue is possible," he said. "The Commission could start discussions with Iceland soon after. In order to be clear, what we are talking about, the level of assistance that the Commission could provide for Iceland, will be small," he said.

"This should be seen more as a political gesture, a compliment, and it will have to be complemented by bilateral support including possibly by other EU members," he said.

He said one reason why the Commission's help to Iceland would be small was that more countries from outside the bloc could apply for assistance from the EU executive.

The North Atlantic island has already made a provisional deal for a $2 billion loan from the International Monetary Fund.

On top of the IMF money, Iceland has said it wants an additional $4 billion from other lenders and has held discussions with its Nordic neighbors, Russia, Japan and the 27-country European Union.

Last week Poland pledged $200 million in aid, Norway offered 500 million euros ($644 million) and the Faroe Islands, with a population of just 48,000, has offered 300 million Danish crowns ($51.6 million).

Iceland faces a deep recession after the global financial crisis sparked the collapse of three of its major banks and a steep dive in its currency.

(Reporting by Jan Strupczewski, editing by Dale Hudson)