Iceland's Prime Minister Johanna Siguardardottir has said the tiny Nordic country faces a choice between using the Canadian dollar or the euro.

"The choice is between surrendering the sovereignty of Iceland in monetary policy by unilaterally adopting the currency of another country, or becoming a member of the EU," she said in a speech at the Social Democrat Alliance party convention on Saturday (10 March) in Reykjavik.

A spokesman for the country's foreign ministry on Wednesday clarified that, for her part, EU membership is the best option.

Iceland is expected to hold a referendum on EU membership early next year, but the euro-crisis has shaken confidence in the Union as an economic safe haven.

For the opposition party which initially floated the idea last summer, the Canadian dollar could be more attractive than the single currency.

Polls say seven out of 10 Icelanders want to ditch the kroner. But the population is split between the euro and the Canadian dollar. Surveys also show that just 26 percent want to join the EU.

Canada's ambassador to Iceland, Alan Bones recently told its national broadcaster that Ottawa is "open to discussing the issue."

The banking crisis in 2008 crippled Iceland's economy and forced it to borrow €7.5 billion from the International Monetary Fund (IMF) and other lenders. It also wiped out people's savings and pensions. Its economy has since rebounded - the IMF projects 2.5 percent economic growth for 2012, while unemployment is down to 7 percent - but the banking drama is still being played out.

In early March, Iceland's former leader Geir Haarde was put on trial for "gross negligence" on the banking collapse.

Meanwhile, the UK and the Netherlands say the country still owes them €4 billion. Iceland in an earlier referendum rejected paying back the money, causing a rift with the two EU countries.

British Conservative MEP Marina Yannakoudakis in an EU parliament debate on Iceland in Strasbourg on Wednesday refused to back a resolution on Iceland's EU membership.

"The Icelandic government is dodging its legal obligation to pay minimum compensation to ... British depositors," she said.

This story was updated at 9.40am Brussels time to clarify that the PM supports EU accession