REYKJAVIK (AFP) Iceland's finance ministry will begin talks this week with the creditors of the failed commercial banks the state took over late last year, the ministry said on Tuesday.

"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 banks, the finance ministry said in a statement.

A North Atlantic island of just 320,000 inhabitants, Iceland saw its economy crash in October when its three main banks collapsed, bringing to a screeching halt a decade of prosperity in which growth averaged 4.0 percent a year.

Thousands of Icelanders lost their jobs and their savings in the collapse, which also brought down the government. The International Monetary Fund (IMF) came to Reykjavik's rescue in November with a loan of 2.1 billion dollars.

According to the Bank for International Settlements, the world's biggest central banking body, German banks lent far more money to Icelanders than banks in any other country, well ahead of Britain and Sweden.

Finance Minister Steingrimur Sigfusson told radio RUV news on Tuesday that efforts to recapitalise the banks Kaupthing, Landsbanki and Glitnir -- which collapsed in the credit squeeze -- had taken longer than expected.

"Some things have taken longer than expected and turned out to be more extensive, such as restructuring the financial system," he said.

An IMF mission to Iceland last week stressed the need for the continued restructuring of the financial sector to get the economy back on its feet.

"There are some outstanding issues that need to be taken forward, particularly as relates to financial sector restructuring and fiscal consolidations," Mark Flanagan, head of the IMF mission to Iceland, said.

Iceland's economy is expected to contract by 10.6 percent in 2009, the finance ministry forecast in May.