(Recasts with comments from party leaders)
REYKJAVIK, Jan 28 (Reuters) - Senior members of Icelandic political parties trying to form a new coalition said on Wednesday they were making progress and one of their first tasks would be to overhaul the central bank board of governors.
The head of the central bank, David Oddsson, has been vilified in local media and by angry protesters, who complain he did not do enough to stave off a financial crisis which has ruined the island's economy.
"It is clear that one of the first things that this government will do is to replace the governors of the central bank," said Johanna Sigurdardottir, a prominent member of the Social Democratic Alliance (SDA) who served as social affairs minister in the outgoing government.
Iceland's president asked SDA leader Ingibjorg Gisladottir this week to form a new government. She is widely expected to form a coalition with the Left-Greens, whose popularity has surged in the wake of the financial meltdown.
Gisladottir, who has said she would be taking a leave of absence as she recovers from recent surgery, held talks through the day on the makeup of a new cabinet. She has proposed Sigurdardottir as a possible prime minister.
Outgoing Prime Minister Geir Haarde resigned this week under pressure from a series of protests, some of which turned violent. "Discussions are going very well," Left-Green leader Steingrimur Sigfusson said during a break from the talks.
"I don't see anything big that we might disagree on in a way that might break up our attempts to form a government coalition with the Social Democratic Alliance," he told reporters.
He later told Reuters that replacing the central bank leaders was vital.
"We're pretty outspoken in this regard. A similar shuffle to the one that took place in the Financial Supervisory Authority needs to take place in the central bank. That is one of our top priorities."
DEAL BY THE WEEKEND?
A Left-Green party official said the negotiations were unlikely to be concluded until Thursday afternoon, allowing a new government to take over the reins on Friday.
Leaders of both parties have said they hope to have a deal ironing out their differences ready by the weekend.
The parties need to find common ground on many issues, including whether to apply to join the European Union.
The Left-Greens are more cautious about EU membership than the Social Democrats. The parties broadly agree a referendum is needed on beginning EU accession talks but have yet to address when such a vote could be held.
The issue is further complicated by the timing of early general elections, which the president has suggested could come between April and June.
Sigfusson has also called for a renegotiation of the terms of a multi-billion-dollar loan tailored by the International Monetary Fund (IMF). He said on Wednesday that IMF officials were due to come to Reykjavik in mid-February.
In the 1990s, Iceland built a booming financial industry, which collapsed in October under the weight of billions of dollars of debt accumulated in an aggressive overseas expansion, leaving the north Atlantic island's economy in tatters.
The economy is expected to contract by as much as 10 percent this year and its dismal state was underlined on Wednesday when data showed annual inflation, fuelled by the collapse in the value of the currency, nearing 20 percent. (Reporting by Kristin Arna Bragadottir; writing by Adam Cox and Niklas Pollard; editing by Angus MacSwan)
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