Crunch claims Iceland's government

Iceland's ruling coalition collapsed today under the pressures of the country's financial meltdown, the first government to fall as a direct result of the global economic crisis

Prime Minister Geir Haarde said he would hand in his resignation to President Olafur Ragnar Grimsson after talks to save his government failed.

Developments on Monday were uncertain with all political parties jockeying for position to replace Haarde's coalition.

"I really regret that we could not continue with this coalition. I believe that that would have been the best result," he told reporters at parliament.

Foreign Minister Ingibjorg Gisladottir, the Social Democrat leader who had been considered a potential replacement for Haarde, announced she would not seek to be prime minister and would take a leave of absence for one or two months.

Gisladottir was in Sweden last week undergoing treatment for a brain tumour.

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.

Haarde's government, a coalition between his Independence Party and the Social Democratic Alliance, has been under pressure since then. Protests, sometimes violent, have been a regular fixture in the usually tranquil nation of 320,000.

"I will go to the president and hand in the government's resignation. Then I will have a meeting with the opposition leaders to discuss the possibility of a national unity government," Haarde told reporters.

He said he hoped someone from his party could lead a unity government but one analyst said he thought the public would demand change.

"This is not unexpected and at least it is the end of the pain politically. I would view it as good news because it should give us more clarity rather than less," Lars Christensen, head of emerging market research at Danske Bank, said.

"Obviously, the left wing is likely to get a very good showing in the election. The likely verdict of the Icelandic people is that they will want the current government well out of the way."

The government collapse did not cause any new trade in Icelandic CDS or the island country's krona currency.

Haarde had already said on Friday he would not seek re-election because he has cancer, and had proposed an early parliamentary election on May 9. Haarde has said he wanted to keep running Iceland until the vote.

Polls show both coalition parties trailing the opposition Left-Green Party, indicating that a shift in power is likely. It was unclear on Monday if elections would be held in May or earlier or if a new coalition could be formed under the current mandate, which runs to 2011.

Jubilant protesters honked horns and banged pots and pans outside Iceland's Althing parliament after the news the government had fallen.

"We are very happy and optimistic today. I think the public deserves a celebration, but of course we realise that there are troubled times ahead and not all our demands have been met," playwright Snorri Hauksson told Reuters.

Foreign Minister Gisladottir had several meetings with Haarde over the weekend and on Monday to discuss her conditions to keep their coalition alive.

She had called for the resignation of the board of the central bank and its governor, David Oddsson.

She had demanded to be prime minister until the election, but on Monday she proposed that Social Affairs Minister Johanna Sigurdardottir take the job instead.

Haarde told reporters that this position had been the final deal breaker and that he had demanded one of his party members would lead a government.

Under the Icelandic constitution, the president is charged with finding a new government with sufficient parliamentary backing.