REYKJAVIK (Reuters) - Icelandic party leaders were meeting for a third day of talks on Thursday to try to reach agreement on a new cabinet as the island struggled with the fallout from a financial collapse.
The president has asked the Social Democrats and the opposition Left-Green Party to form a new government to replace the administration of Geir Haarde, who resigned as prime minister on Monday under pressure from a series of protests. His centre-right Independence Party is not being included.
"The Left Greens will meet with Social Democrats at 11 a.m. (11 a.m. British time) in parliament today to start discussions again," Left-Green party spokesman Finnur Dellsen said.
The global financial crisis hit the North Atlantic nation in October, ending a decade of rising prosperity by triggering a collapse in the currency and financial system.
To stay afloat, Iceland secured $10 billion (7 billion pounds) in financial aid from the IMF and several European countries.
The financial crisis has sparked protests, sometimes violent, as Icelanders blamed Haarde and other leading officials for failing to stave off the economic mayhem.
Police used pepper spray and arrested six protesters on Wednesday evening at a demonstration outside a NATO meeting in the capital Reykjavik.
Social Democrat leader Ingibjorg Gisladottir has proposed that Social Affairs Minister Johanna Sigurdardottir become prime minister in a new cabinet while Gisladottir takes sick leave to recover from treatment for a benign brain tumour.
The Social Democrats were the junior party in the outgoing coalition, while the opposition Left-Greens now lead opinion polls.
The talks between the parties need to find common ground on many issues, including whether to apply to join the European Union. Leaders of both parties have said they hope to iron out their differences by the weekend.
"The public has to feel like a new government is working on how to save what is left to be saved, both in regard to individual finances and to the economy. That is the first step to regaining the public's trust in the government," the daily Frettabladid commented.
The Left-Greens are more cautious about EU membership than the Social Democrats, although the parties broadly agree there should be a referendum on whether to open EU accession talks. The issue is further complicated by the timing of an early general election, which could come between April and June.
The Morgunbladid daily said in an editorial it was not hard to understand why the parties might disagree on the timing.
"The Left-Greens are now on top in all opinion polls. The Social Democratic Alliance is, on the other hand, wounded and has lost almost half its support."
Left-Green leader Steingrimur Sigfusson has also called for a renegotiation of the terms of a $10 billion loan package brokered by the International Monetary Fund (IMF).
The economy is expected to contract by as much as 10 percent this year. Iceland's central bank held its key policy interest rate unchanged at a record 18 percent on Thursday.
The Sedlabanki was due to publish an analysis of the economic situation in its Monetary Bulletin at around 11 a.m..
(Reporting by Kristin Arna Bragadottir; writing by Kim McLaughlin; Editing by Kevin Liffey)
