Iceland has dropped its bid to join the European Union in line with pledges made two years ago by its eurosceptic government.

Iceland first applied for EU membership in 2009 but Foreign Minister Gunnar Bragi Sveinsson said in a statement last night that the centre-right government had informed current EU president Latvia and the European Commission of its decision to annul the application.

"Iceland's interests are better served outside the European Union,"he said.

Iceland first applied for EU membership under a leftist government in 2009, when the country was badly shaken by an economic crisis that saw the Icelandic krona lose almost half its value, making eurozone membership an attractive prospect.

But the thorny issue of fishing quotas was seen as a key obstacle to joining the bloc, although it was never brought up in the accession talks.

Fishing represents an important part of the Icelandic economy, and it was never made clear how differences between Brussels and Reykjavik could be patched over on the subject.

Thousands of protesters had thronged the streets of Reykjavik last year to demand a referendum after the government said it was dropping its EU membership bid without a popular vote.

But opinion polls more recently began to show growing resistance among Icelanders to EU membership.

The centrist Progress Party and the right-wing Independence Party came to power in 2013 they suspended the talks with Brussels.

Iceland has said it wants to maintain "close ties and cooperation" with the EU.