By Kim McLaughlin
REYKJAVIK (Reuters) - Iceland's commerce minister resigned Sunday, casting further doubt on the government's ability to rule until a proposed early election in May and tackle an economic collapse.
Prime Minister Geir Haarde shocked the island nation of 320,000 Friday when he said he would not seek re-election because he has cancer, and proposed an early parliamentary election on May 9.
His commerce minister, Bjorgvin Sigurdsson, 38, said he was resigning because of his role in the financial cave-in, which has prompted protesters to demand the government's immediate resignation.
"I realised last night that for me, at least, there is no going back," Sigurdsson, a member of the Social Democrats, the junior party in the ruling coalition, told a news conference.
"The anger and distrust of the public is too deep for me to be able to regain their trust."
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, head of the Independence Party, has said he wants to keep running Iceland until the vote, despite daily demonstrations, some of which have turned violent. But he said it was impossible to say if the coalition would hold.
"Either we will continue with this coalition, or not. I believe that if it is 'not', the situation will only be worse," he told reporters.
Sigurdsson and the Financial Supervisory Authority oversaw the nationalisation of Iceland's three main banks, which all crumbled under a mountain of foreign debt in the global credit crunch.
He said the chairman of the Financial Supervisory Authority and its director would also resign.
CALLS FOR CENTRAL BANKER'S HEAD
Foreign Minister Ingibjorg Gisladottir, leader of the Social Democrats, met Haarde Sunday evening to discuss the future of their coalition. She called for the resignation of the board of the central bank and its governor, David Oddsson, saying Sigurdsson's decision turned the spotlight on them.
"I assume we will have some sort of agreement tomorrow. We want changes in the bureaucracy, especially in regard to the central bank," she told reporters after leaving Haarde's house.
After she left, Haarde said his party had not ruled anything out in the talks, including carrying out a reshuffle at the central bank or forming a national unity government.
"Our primary responsibility is keeping the country running," he said. Oddsson declined to comment.
Polls show both coalition parties trailing the opposition Left-Green Party, indicating that a shift in power is likely.
Around 6,000 protesters called Saturday for the government to step down immediately. Many have been angry that until this week no senior officials have stepped down.
Sunday, about 100 demonstrators maintained a vigil outside parliament, in the sixth straight day of protests.
"Finally, the government seems to be listening to the people and is at last meeting our demands," law student Helga Vala Helgadottir said at a cafe near parliament.
"Now we just want the coalition to resign and then we can really start rebuilding our society."
Gisladottir has also called for an election this spring, two years ahead of the 2011 deadline, but has yet to agree a date with Haarde.
(Additional reporting by Kristin Arna Bragadottir and Omar R. Valdimarsson; Editing by Kevin Liffey)
