Cracks in Iceland's government

Reykjavik - Iceland's political leaders held talks on Monday to try to avoid the breakup of the country's coalition government.

Prime Minister Geir Haarde's fragile grip on power rests on the outcome of discussions with his coalition partner and foreign minister, Ingibjorg Gisladottir. Her Social Democratic Alliance Party has threatened to withdraw from the government.

The Alliance party has called on Haarde to fire central bank governor David Oddsson - a member of Haarde's Independence Party and Iceland's former prime minister - and commit the country to closer ties with Europe.

If the ruling coalition collapses, Gisaldottir's Alliance could seek to form a new coalition with two leading opposition parties until the May elections, which had originally been slated for 2011 but were recently moved up.

Iceland has been mired in crisis since the collapse of the country's banks under the weight of debts amassed during years of rapid expansion. Inflation and unemployment have soared, and the krona currency has plummeted.

Haarde's government has nationalized banks and negotiated about $10bn in loans from the IMF and individual countries. In addition, Iceland faces a bill likely to run to billions of dollars to repay thousands of Europeans who held accounts with subsidiaries of collapsed Icelandic banks.

The country's commerce minister, Bjorgvin Sigurdsson, quit on Sunday citing the pressures of the economic collapse.

Sigurdsson, a member of Gisaldottir's party, said Icelanders had lost trust in their political leadership.

Thousands have joined noisy daily protests in the last week over soaring unemployment and rising prices.

Gisladottir and Haarde were holding talks on Monday at Iceland's Parliament after they failed to reach any agreement in discussions Sunday, Haarde's spokesman Kristjan Kristjansson said.

- Sapa