Iceland's government collapses over financial crisis

By Kim McLaughlin

REYKJAVIK (Reuters) - Iceland's ruling coalition collapsed on Monday under pressure from sometimes violent demonstrations, the first government to fall as a direct result of the global economic crisis.

Jubilant protesters honked horns and banged pots and pans outside Iceland's Althing parliament after the news the government had fallen. It was not immediately clear who might be able to form a new administration or how quickly.

Prime Minister Geir Haarde handed in his resignation to President Olafur Ragnar Grimsson after talks to save his government failed. Grimsson said he was unlikely to give any party a mandate to form a new government until Tuesday.

"It's very natural that the president will first sound out if there is a majority to be found in parliament," he said. "I have asked everyone in the current (administration) to continue to do their jobs until a new government has been formed."

The global financial crisis hit Iceland in October, ending a decade of rising prosperity in a matter of days by triggering a collapse in the currency and financial system.

Iceland was forced to seek an IMF-led bailout and economic output is expected to shrink as much as 10 percent this year, resulting in thousands of lost jobs.

Protests became a regular fixture in the usually tranquil nation of 320,000, putting heavy pressure on the coalition of Haarde's Independence Party and the Social Democratic Alliance.

"These latest developments mean that the country is currently without a government and no one can say with any certainty what happens next," said politics professor Gunnar Helgi Kristinsson at the University of Iceland.

Some analysts have expressed concern at the possibility that a new Icelandic government might clash with the IMF. The Washington-based lender said on Monday it would support Reykjavik as long as "appropriate" policies were in place.

A NEW COALITION?

The IMF pushed Iceland to drive up interest rates to a record high late last year, adding financial pain to Icelanders fuming over their leaders' failure -- until now -- to accept responsibility for the crisis.

On Sunday, Iceland's commerce minister directly acknowledged his role in the crisis and announced his own resignation.

Foreign Minister Ingibjorg Gisladottir, the Social Democratic leader once seen as a possible replacement for Haarde, said she would not seek the job and would take a leave of absence for one or two months.

Gisladottir was in Sweden last week undergoing treatment for a brain tumor, which turned out to be benign.

"I have not met the leaders of the Left-Greens and Progressive parties but if what they have been expressing in the media is true, I believe that we could probably reach an agreement about a coalition," she told reporters.