UPDATE 1-EU to recommend start of Iceland talks - EU official

* Green light for Iceland accession talks seen on Feb. 24

* Icesave talks with Britain, Netherlands key to progress

(Adds details, background)

BRUSSELS, Feb 16 (Reuters) - The European Commission will recommend next week that the European Union begin accession talks with Iceland, an EU official said on Tuesday, launching a process Reykjavik hopes will lead to EU membership by 2012.

Iceland, an island of 320,000 people in the far north of Europe, had been reluctant to join the bloc for decades and only applied last year when the global financial crisis devastated its banking system.

“On Feb. 24, the European Commission will issue its opinion recommending the start of accession negotiations,” the official told Reuters.

It is hoping for speedy accession talks, since it is far better prepared than other EU hopefuls and already belongs to the EU’s single market and its Schengen borderless zone.

But its aspirations are now tied partially to a dispute with the Netherlands and Britain over $5 billion in debts lost in the country’s banking collapse in late 2008.

Officials from the three countries are holding talks this week to try to agree a deal on how Iceland should repay the money. Any progress will be key to pushing EU talks quickly.

Iceland’s Finance Ministry said on Tuesday the discussions would continue in the coming days. [IDn:LDE61F1ZR]

Britain and the Netherlands say Iceland owes them for repaying savers who lost money in online accounts during the financial crisis.

In addition to the Icesave issue, Iceland may face tough negotiations on giving EU members states access to its rich fishing zones, a key driver to its economy.

The decision to start accession talks is due to be validated by the college of 27 European Commissioners on Wednesday. (Editing by Luke Baker)