The foreign ministry said it had received an opinion from its constitutional advisors that the government was not bound by a 2009 parliamentary vote to launch the membership talks.
"After receiving this opinion the foreign minister has decided to consider dissolving the negotiation committee," the ministry said in a statement, quoted by the AFP news agency.
On a recent visit to Brussels, the new Prime Minister of Iceland Sigmundur Gunnlaugsson was told by European Commission President José Manuel Barroso to decide “without further delay” whether it wanted to continue accession negotiations or abandon plans to join the EU.
The committee's dissolution effectively signals the abandonment of these negotiations.
On 27 April, Iceland held elections, inflicting to the ruling pro-European Social Democrats the the biggest defeat any ruling national party has suffered since independence from Denmark in 1944.
Gunnlaugsson, 38, is Europe's youngest democratically elected head of government. Since 2009, he has led the Progressives, a centre-right and liberal party affiliated with Liberal International.
The Progressive Party draws most of its support from farmers and fishermen. In coalition with the Independence Party (see background), the Progressives oppose EU membership.
In May, the new government announced a halt to the country’s EU accession talks until Icelanders vote in a referendum within the next four years on whether they want membership negotiations to continue.
The decision of Iceland to stop the accession talks can be seen as bad news in Brussels. Croatia's recent accession gave EU leaders the opportunity to boast about the attractiveness of EU membership, despite the economic and sovereign debt crises.
Iceland was put on a fast track to EU accession, as it had already taken on board much of the EU legislation as member of the European Economic Area (EEA). It formally applied for EU membership on 16 July 2009 and started accession talks only one year later. The process has taken much longer for any other applicant country.
>> Read: Iceland gatecrashes EU antechamber
But Iceland is a special case, as the country’s powerful fishing industry is in deep conflict with the EU over fishing quotas. The Commission says it can accommodate Iceland’s “specificities”, but in fact the differences between Reykjavik and Brussels are not only of technical but of political nature.
The EU considers that Iceland is overfishing and that the island nation should accept strict quotas. Iceland says it has more experience in fishing that the Union itself and that it could teach Brussels best practices.
Recently, Iceland backed the Faroe Islands in a fishing quotas conflict with the EU and objected to the EU position in the strongest terms.