The island nation applied for membership in 2009, in the aftermath of the financial crisis, but decided to suspend talks in 2015.
The Icelandic government is proposing to hold a referendum on 29 August on the resumption of negotiations for accession to the European Union.
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A resolution is expected to be presented to Parliament next week, according to Minister for Foreign Affairs Kristrún Frostadóttir.
The European Commission has welcomed the announcement.
"Iceland is a close and valued partner of the EU," said Markus Lammert, spokesperson for the European Commission. "Our cooperation is already strong and wide-ranging and we look forward to continuing and further strengthening our close cooperation with the Icelandic authorities."
Iceland submitted an application for membership in 2009 in the wake of the international financial crisis, which had severely shaken the island's economy. Discussions between 2010 and 2013 resulted in the closure of 11 of the 33 negotiation chapters.
However, in 2015, the Icelandic government decided to leave the negotiating table.