Brussels - European Union leaders agreed on Thursday to open membership negotiations with Iceland despite differences over whale hunting and a bank collapse that hit British and Dutch investors.
European heads of state and government meeting in Brussels gave Iceland candidate status less than a year after it applied to become the bloc's 28th member.
A diplomatic source said EU leaders approved a summit declaration which states that Iceland "meets the political criteria" and "accession negotiations should be opened."
However the text also spoke of "areas of weakness... including in the area of financial services," while welcoming Reykjavik's "commitment to address these issues."
Britain and the Netherlands said the talks should go hand in hand with negotiations over demands that Iceland reimburse compensation paid out by those two countries to citizens who held accounts at the failed Icesave bank.
Dutch Prime Minister Prime Minister Jan Peter Balkenende said his country would not block the start of membership negotiations.
"But before it can become a member, it will have to fulfill its obligations toward Britain and the Netherlands," he told reporters as he arrived at the summit.
The Icelandic authorities will also have to make extensive moves towards shutting down their controversial whaling industry before they can think of taking their seat in Brussels, as European rules ban whale hunting.Iceland a natural fit for the EU
Iceland's application to join the European Union and adopt the euro as its currency, which it lodged in July 2009, could also stumble on the issue of access for European fleets to Icelandic fishing waters.
But potential problems are not only with its would-be partners.
An opinion poll this week showed a substantial majority of Icelanders want their government to tear up the EU application form. A national referendum will have to be held before Iceland can join the EU club.
In a March referendum Icelanders massively rejected a deal to pay Britain and the Netherlands billions for their losses in the collapse of the Icesave bank.
It was only after the global financial hurricane battered its banks, forced its currency down and pushed it to the International Monetary Fund cap in hand that Reykjavik decided to apply for EU membership.
However European capitals see Iceland as a natural fit for the EU, as long as the obvious hurdles can be overcome.
There are already three official EU candidate nations - Turkey, Croatia and Macedonia - all of which have been in the system since at least 2005. But Iceland could leap-frog all of them, political analysts say.
Brussels deems that Iceland, already a member of NATO, meets the overall criteria for membership, raising hopes in Reykjavik that the island nation could join the bloc in 2012, subject to the referendum.
Iceland is already part of the Schengen treaty that allows unfettered travel between most European nations - and as a part of the European Economic Area, it is firmly integrated into the European single market.