By Kim McLaughlin
REYKJAVIK (Reuters) - Icelandic Prime Minister Geir Haarde, under growing pressure from a financial collapse that has led to violent protests, announced on Friday he was stepping down and wanted an early election to be held on May 9.
After meeting senior members of his Independence Party, Haarde, 57, told a news conference he was going abroad soon for surgery to treat a malignant tumour of the oesophagus.
"I have decided not to seek re-election as leader of the Independence Party at its upcoming national congress," Haarde said, adding a new chairman would lead the party in an early election.
He added he had spoken to Foreign Minister Ingibjorg Gisladottir, head of the junior party in the ruling coalition, by telephone about a possible May 9 election and there would be further talks on the issue.
Gisladottir had been pressing for an early election. She herself was returning to Iceland on Friday from Sweden, where she was getting treatment for a brain tumour. An election would not normally be held until 2011.
One political commentator said Thorgedur Katrin Gunnarsdottir, deputy chairman of the Independence Party, would seek to replace Haarde at the March 26-29 congress.
"As Haarde is leaving for treatment in the next few days, Gunnarsdottir is likely to take over his duties as Prime Minister," Einar Mar Thordarson, a political scientist at the University of Iceland, said.
Haarde, who became prime minister in June 2006, has been under pressure since the global financial crisis hit Iceland, which has a population of 320,000, in October.
It triggered a collapse in the North Atlantic island's currency and financial system under the weight of billions of dollars of foreign debts incurred by its banks.
Protests turned violent in the early hours of Thursday, with demonstrators pressing for Haarde, the central bank governor and other senior officials to go. Police used teargas for the first time since 1949 against demonstrators.
A few protesters continued a vigil outside parliament on Friday. "We will not stop protesting because our main demand is that the government coalition should end. I don't think it's a coincidence that we were told today that Haarde has cancer. I feel our trust has been violated," docks worker Hinrik Thor Svavarrs told Reuters.
Some senior figures in his party had also said they favoured an early election, but Haarde had up to now vowed to defy plunging popularity and stay on.
Haarde pledged on Friday to make every effort to ensure that the election did not disrupt the economic recovery programme which Iceland was implementing together with the International Monetary Fund.
To stay afloat last year, Iceland negotiated a $10 billion (7 billion pound) aid package crafted by the IMF and effectively froze trade in its currency.
The handful of market analysts still looking at Iceland's shattered economy saw little immediate impact from upcoming elections, with the crown currency still barely traded in international markets after last year's collapse.
The Icelandic crown has not traded in offshore international markets since Wednesday, according to Reuters data, although it has strengthened slightly in local markets after the announcement.
The local market is all but ignored by foreign investors as it is dominated by local banks which have been under government control since the collapse.
"This is not a good time to have a seriously sick prime minister and new elections," Michael Ganske, head of emerging market research at Commerzbank, said.
"Although obviously the country is already in a very difficult situation, it's not that we are talking about a highly successful government losing its main leader and then capital markets panic. The current leadership didn't do a very good job at organising the economy so I think market wise its not a major issue," he said.
