By Kim McLaughlin
REYKJAVIK (Reuters) - Iceland's ruling coalition collapsed on Monday under pressure from sometimes violent demonstrations, the first government to fall as a direct result of the global economic crisis.
Jubilant protesters honked horns and banged pots and pans outside Iceland's Althing parliament after the news the government had fallen. It was not immediately clear who might be able to form a new administration or how quickly.
Prime Minister Geir Haarde handed in his resignation to President Olafur Ragnar Grimsson after talks to save his government failed. Grimsson said he was unlikely to give any party a mandate to form a new government until Tuesday.
"It's very natural that the president will first sound out if there is a majority to be found in parliament," he said. "I have asked everyone in the current (administration) to continue to do their jobs until a new government has been formed."
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.
Iceland was forced to seek an IMF-led bailout and economic output is expected to shrink as much as 10 percent this year, resulting in thousands of lost jobs.
Protests became a regular fixture in the usually tranquil nation of 320,000, putting heavy pressure on the coalition of Haarde's Independence Party and the Social Democratic Alliance.
"These latest developments mean that the country is currently without a government and no one can say with any certainty what happens next," said politics professor Gunnar Helgi Kristinsson at the University of Iceland.
Some analysts have expressed concern at the possibility that a new Icelandic government might clash with the IMF. The Washington-based lender said on Monday it would support Reykjavik as long as "appropriate" policies were in place.
A NEW COALITION?
The IMF pushed Iceland to drive up interest rates to a record high late last year, adding financial pain to Icelanders fuming over their leaders' failure -- until now -- to accept responsibility for the crisis.
On Sunday, Iceland's commerce minister directly acknowledged his role in the crisis and announced his own resignation.
Foreign Minister Ingibjorg Gisladottir, the Social Democratic leader once seen as a possible replacement for Haarde, said she would not seek the job and would take a leave of absence for one or two months.
Gisladottir was in Sweden last week undergoing treatment for a brain tumor, which turned out to be benign.
"I have not met the leaders of the Left-Greens and Progressive parties but if what they have been expressing in the media is true, I believe that we could probably reach an agreement about a coalition," she told reporters.
The Social Democrats have been in favor of membership of the European Union, an idea many on the island now like as they believe it could have helped the economy during the crisis.
Other political parties have also been warming toward EU membership, which the Independents have long opposed, partly over fears about the impact on the important fishing industry.
Kristinsson said a minority government of the Social Democrats and the Left-Greens was most likely.
Haarde said he had had informal talks with opposition leaders to discuss the possibility of a national unity government under his party's leadership, but one analyst said he thought the public would demand change.
Under Iceland's constitution, the president is charged with finding a new government with sufficient parliamentary backing.
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.
But many of those calling for change expressed joy.
"We are very happy and optimistic today," playwright Snorri Hauksson told Reuters. "I think the public deserves a celebration, but of course we realize that there are troubled times ahead and not all our demands have been met."
Polls show both former coalition parties trailing the Left-Greens, suggesting a shift in power is likely.
International trade in the Icelandic crown has dried up, as has trade in Icelandic credit default swaps, which insure investors against the risk of default.
Meanwhile, efforts to revive currency trade run the risk of further disruption as many are speculating central bank chief David Oddsson may be the next to go. Gisladottir has called for Oddsson's resignation, as have thousands of protesters.
In announcing her intention to step back from the current political turmoil, Gisladottir proposed Social Affairs Minister Johanna Sigurdardottir could be a candidate for prime minister.
(Additional reporting by Kristin Arna Bragadottir and Omar R. Valdimarsson; Editing by Jon Boyle)