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Iceland politicians meet to thrash out new government

REYKJAVIK (Reuters) - Icelandic politicians met on Wednesday for talks on the makeup of a new cabinet to lead the country out of an economic crisis that has toppled the government and said they were moving toward agreement.

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Iceland’s president has asked the Social Democrats to form a new government with the opposition Left-Green Party to replace the cabinet of Prime Minister Geir Haarde, who resigned this week under pressure from a series of angry protests.

“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 journalists.

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.

Social Democrat leader Ingibjorg Gisladottir has proposed that Social Affairs Minister Johanna Sigurdardottir become prime minister in a new cabinet while she takes leave of absence to recover from treatment for a benign brain tumor.

The talks between 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).

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, fueled by the collapse in the value of the currency, nearing 20 percent.

The financial crisis has sparked protests, sometimes violent, in the once-tranquil streets of the capital as Icelanders blamed Prime Minister Haarde and other leading officials for failing to stave off the economic mayhem.

Reporting by Kristin Arna Bragadottir; writing by Niklas Pollard; editing by Andrew Roche