Iceland 10 days by bus or small car? cheap hostels?

Hello, a friend and I plan in June a 10 days trip to Iceland.

We are are not shure if a small non 4x4 car for one week around the island would be enough or if it is better to go by bus to the main spots. We need some informations, what might be better and if by bus, if they are frequent and flexible in booking?

By the way, if you know where we can stay more or less bugdet (hostels, farms...?) please let us know, how to find the best cheaper options in iceland for sleeping.

And finally, what are the must seen things in Iceland.
Thanks

if by bus, if they are frequent and flexible in booking?

Advance booking is not required. But in general buses are far from frequent. Timetables here. http://www.nat.is/travelguideeng/bus_schedules_iceland.htm

We are are not shure if a small non 4x4 car for one week around the island would be enough

Depends what your ambitions are. Plenty of people use a week to drive around the island in a small car.

By the way, if you know where we can stay more or less bugdet (hostels, farms...?)

The cheapest place to stay is in campsites. There are some hostels, google will find them for you. Then there Sleeping Bag Accommodation (SBACC), which is where you bring your own sleeping bag. Accommodation with made-up beds is a lot more expensive than SBACC. Guesthouses and farms may offer SBACC, or made-up beds, or both. In Reykjavik accommodation needs to be booked long in advance.

what are the must seen things in Iceland.

That depends upon you. I suggest you buy a guidebook, or search the web, and form your own opinion.

For getting around the island on a budget, why not check out Iceland's kick ass ride sharing website. http://www.samferda.net