Reykjavik  - Iceland's government Monday presented a plan to issue bonds worth 2.1 billion dollars (1.5 billion euros) to capitalize three major banks and "re-establish" its banking system.

Islandsbanki, New Kaupthing and New Landsbanki were launched after the main Icelandic commercial banks in October 2008 collapsed over the global finacial crisis.

The plan was to be concluded by August 14 and hinges on approval

from among others the Icelandic Financial Supervisory Authority.

"Our agreements announced today are a major step forward in the re-establishment of a strong banking system," Finance Minister Steingrimur Sigfusson said in a statement.

The size of the capitalization could be further reduced if two of the banks - Islandsbanki and New Kaupthing - subscribe to majority share stakes in the new banks, the statement said.

In addition to the collapse of the main commercial banks Glitnir, Landsbanki and Kaupthing, the fallout of the crisis contributed to the fall of the government.

In April this year a red-green coalition headed by Prime Minister Johanna Sigurdardottir was voted into office. The government said it would move to open membership talks with the European Union.

An application was handed in Friday after parliament approved the government's bid to seek membership talks with the bloc.

Shoring up the banking sector is one of the requirements for a possible successful membership bid.(dpa)