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BAGHDAD, Jan 21 (Reuters) - Iraq plans to sell local bonds to the public for the first time since 2003, with a 5 trillion dinar ($4.24 billion) issue expected this year, the finance minister said on Thursday, as the country seeks to cover a widening budget deficit.

The three-year bonds will carry an interest rate of 10 percent and will be sold to "citizens and employees", Hoshiyar Zebari told a news conference in Baghdad.

Iraq already issues treasury bills to domestic banks and has international bonds outstanding.

Iraq's budget is under growing strain from costs associated with the fight against Islamic State and falling oil prices, which have dropped below $30 per barrel from more than $100 per barrel two years ago.

The Iraqi government, which gets around 95 percent of its revenue from oil sales, expects a deficit of 24 trillion dinars in its 2016 budget.

The local bonds are part of measures to plug the gap, along with loans from the World Bank and other international donors, Zebari said.

"The sale will be the first after the regime change of 2003," Zebari said, referring to the U.S.-led invasion that toppled Saddam Hussein.

Iraq said in July it would begin issuing $5 billion worth of domestic bonds by the fourth quarter of last year, but Zebari said in a subsequent telephone interview that those plans had been delayed.

"Now we have to do it. We don't have a set date yet, but we have to do the sale this year," Zebari told the news conference in Baghdad.

Last month Zebari told Reuters Iraq had revived a separate plan to sell $2 billion in international bonds in 2016, which it shelved last year because the yield it would have had to pay on the debt was deemed too high.

The yield on Iraq's outstanding dollar bond maturing in 2028 stands at 14.805 percent, up from 8.3 percent at end-2014. ($1 = 1,180.0000 Iraqi dinars)

(Reporting by Saif Hameed; Editing by Gareth Jones) ((Saif.Hameed@thomsonreuters.com;))