Contracted heels/cracked sulci are almost always a sign of thrush. I am experiencing the same problem at the moment, and this stuff works wonders:
NO THRUSH - The First Ever DRY Equine Treatment. Natural, safe, Results in 3-5 days
The important thing is to keep your horses hooves clean (pick them out everyday) and make sure his environment is a dry as possible. Apply No Thrush once daily deep into the sulci, around the frog and any grooves in the hoof, then use your hoof pick brush to brush it into the crevases. It kills the bacteria while promoting healthy growth of new tissue and the great thing about this product is you can't over do it - use as much as you want.
Iodine does help to dry the hooves but is only effective in dry conditions. It will also harm healthy tissue and so will hydrogen peroxide which at best, gets rid of the infection but leaves sensitivity in its wake and again leaves your horse open to re-infection. You need to be promoting as much frog growth as possible in cases of thrush, the crack in the horses heel should not be there.
There is also a product called Dry Cow Mastis (I think) which although I haven't used my self living in Australia have heard it works wonders. You can read my thread about my recent case of Thrush called - 'Deep Sulcus Thrush, the night mare begins'.
Hope this helps and goodluck with the treatment.