By Kim McLaughlin
REYKJAVIK (Reuters) - Iceland's prime minister, under pressure from a financial collapse that left the economy in tatters and sparked violent protests, said 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, Geir Haarde, 57, told a news conference he was going abroad 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. A new chairman would lead the party in an early election.
Haarde, a U.S.-trained economist, said 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's Social Democratic Alliance has 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 Gunnarsdottir, deputy chairman of the Independence Party, would be likely 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 has been under pressure since the global financial crisis hit Iceland, a North Atlantic island and NATO member of 320,000, in October.
It triggered a collapse in the 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.
Protests linked to the global economic downturn have also taken place in Bulgaria, Lithuania and Latvia. High youth unemployment was a main factor in unrest in Greece, initially sparked by the police shooting of a youth.
PROTESTERS KEEP VIGIL
A few protesters maintained 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.
As no party is likely to win an overall majority, a new coalition is all but certain.
However, its likely composition is unclear as Iceland has no tradition of the bloc politics seen in some Nordic countries, where power has shifted between fairly rigid right-wing and left-wing coalitions.
Recent opinion polls indicate that the Left-Green Party, currently in opposition, is best placed to head a new coalition.
To stay afloat last year, Iceland negotiated a $10 billion (7 billion pound) aid package crafted by the International Monetary Fund 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.
"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.
