Crisis-hit Iceland heads for early election

* Icelandic coalition partner urges election in spring

* New poll shows further slump in government rating

* Anti-government protests continue

REYKJAVIK, Jan 22 (Reuters) - Iceland moved closer to a snap election on Thursday when the foreign minister joined calls for an early vote, while police teargassed demonstrators after anti-government protests turned violent.

Iceland has been plunged into crisis since October when it fell victim to the global meltdown, with its currency collapsing and its financial system imploding under the weight of billions of dollars of foreign debts incurred by its banks.

Foreign Minister Ingibjorg Gisladottir, head of the junior government coalition partner, said she wanted elections this spring, but pledged to continue working with the Independence Party of Prime Minister Geir Haarde for as long as possible.

"Neither party has suspended the coalition government and we will continue working together as long as we can, if I can put it that way," Social Democrat Gisladottir told national radio.

"However, my opinion is that elections should be held this spring and upon my return home I will focus on getting that done," she said, referring to her return from Sweden, where she was getting treatment for a brain tumour.

Haarde, whose opposition to an early vote puts him at odds with senior party figures, has so far vowed to stay despite the plunging popularity for his government. The next scheduled election is 2011. His office declined to comment on election issues, but said he would make a statement on Friday.

He has said an early poll would disrupt efforts to stabilise an economy rocked by the collapse of its banks last year following a decade-long boom fuelled by cheap foreign funding.

But senior figures in his own party also backed an early election. Deputy leader Thorgerdur Gunnarsdottir told parliament the party expected an election this year.

Independent Party parliamentarian Illugi Gunnarsson told Reuters it was "obvious" that early elections would take place, but that the party had not discussed any specific dates.

A poll by Market and Media Research in Iceland showed support for the government has dropped and if elections were held now the opposition Left-Green Party would be biggest party.


Iceland's economy is set to shrink 10 percent this year and unemployment is surging. To stay afloat during the worst of the crisis, Iceland negotiated a $10 billion aid package crafted by the IMF and effectively froze trade in its hobbled currency.

Protests have been held regularly on Saturdays since the crisis broke last year, but this week they have been held every night since Tuesday. A demonstration turned violent early on Thursday and police had to use tear gas for the first time since protests over Iceland's entry into NATO in 1949.

On Thursday evening the protest was more peaceful. About 300 people stood outside parliament, many wearing orange arm bands as a token of rejection of the overnight violence.

The demonstrators want Haarde, the central bank governor and other senior officials to quit, accusing them of "incompetent rule" and cosy ties to the business elite.

Latvia, Bulgaria and other European countries hit hard by the global economic meltdown have also seen unrest.

"It's progress that people from both government parties have said today they want early elections but we, or at least I will not stop until the date for elections is officially pronounced," writer Ottar Nordfjord told Reuters.

Besides its economic woes, Iceland also faces a strategic question over whether to join the European Union, for which public support has risen during the crisis.

Baldur Thorhallsson, University of Iceland political science professor, said Haarde's eurosceptic group may change tack and back EU entry at next week's Independent Party congress.

"The government stands on very wobbly feet right now," Thorhallsson said. "The Social Democrats gave the Independent Party an opportunity to change their (EU) course, and will probably wait with any actions until after their congress."