REYKJAVIK, Jan 26 (Reuters) - Iceland's ruling coalition fell apart on Monday as Prime Minister Geir Haarde said he was handing in his immediate resignation and the head of one of the coalition partners said she was taking a leave of absence.
Haarde, who announced on Friday his intention to step down because he is fighting cancer, had planned to continue in his role until early elections proposed for May.
But political pressure in Iceland over the handling of the island nation's financial meltdown has proved too intense.
What's in store politically in the coming days and weeks and what are the implications for the big issues Iceland faces?
A NEW GOVERNMENT?
Broadly speaking there are three main political possibilities -- a national unity government, a new coalition or a government made up of the previous coalition partners, the Independents and the Social Democratic Alliance (SDA).
Haarde's Independents have 25 of 63 parliamentary seats. The SDA, which has 18 seats, has been headed by Foreign Minister Ingibjorg Gisladottir. Recently treated for a brain tumour which proved benign, Gisladottir said on Monday she was taking a leave of absence for one or two months. She suggested Social Affairs Minister Johanna Sigurardottir as a possible prime minister.
After the Independents and the SDA, the next biggest faction is the Left-Green Party with nine seats. Polls show it is gaining popularity and its leader, Steingrimur Sigfusson, has thrown his hat in the ring as a possible prime minister.
"What is likely to happen is that a minority government of the Social Democratic Alliance and the Leftist Greens is formed," said Gunnar Helgi Kristinsson, a professor of political science at the University of Iceland.
"However, there are quite a few points which the two parties would have to agree on, such as the European Union, the IMF (International Monetary Fund) and who should become prime minister."
He said it was not impossible that Gisladottir's suggestion of Sigurardottir could be taken up. "She is the most popular minister of the outgoing government and has been successful in her role."
CENTRAL BANK, CURRENCY DILEMMAS
Along with Haarde, another person who has come in for heavy criticism has been central bank chief David Oddsson, previously Iceland's longest-serving prime minister and the architect of an economic overhaul during the past decade.
Local media have speculated about Oddsson's future for months, but there was always the knowledge that he had a staunch ally in Haarde. Continued...
The coalition government in Iceland has collapsed following the international banking crisis.

Icelandic Prime Minister Geir Haarde 

Prime Minister Geir Haarde of the conservative Independence Party had begun talks with coalition partner party Social Democratic Alliance in the run-up to an early general election planned for May. It was reported yesterday that these talks had failed and the coalition was dissolved. The centre-left Social Democrats will now try to build a coalition with opposition parties, according to the BBC.

The Independence Party currently has 25 of the 63 seats in the country's unicameral Althing (parliament), and the Social Democratic Alliance holds 18 seats. The remainder of the government consists of the Left-Green Movement (9 seats), the Progressive Party (7) and the Liberal Party (4).

The coalition was formed after the election in 2007, but became uneasy after the global financial crisis caused Iceland to nationalise its banking system and ask for help from the International Monetary Fund, with Social Democrats seeking closer ties with the European Union and the replacement of the head of the central bank. Social Democrat leader and Foreign Minister Ingibjörg Gísladóttir has suggested Jóhanna Sigurðardóttir, the Social Affairs and Social Security Minister, as the next prime minister.

Iceland's interest rate is now 18%, with GDP expected to fall 9.6% this year. Inflation has reached 13.1%.