Iceland begins building new government

BOOM TO BUST

Gisladottir said she was hoping for a political deal by the weekend, while Left-Green leader Steingrimur Sigfusson told Reuters talks had been proceeding well and that he expected a deal by the second half of the week.

Gisladottir, who recently had treatment for a benign brain tumor, appeared on Monday to rule herself out from becoming prime minister. She said she planned to take a leave of absence for one or two months, and proposed Social Affairs Minister Johanna Sigurdardottir as a candidate instead.

Coalition talks must bridge a number of differences central to the future of a country, once relatively poor, which began to thrive in the 1950s with the establishment there of a U.S. Cold War base. In the 1990s it built a booming financial industry, which quickly collapsed with the onset of global crisis.

"Forming a new government should not take long. I believe that informal talks about the new government had been going on for a longer time than the political leaders are willing to acknowledge," said University of Iceland professor of politics Baldur Thorhallsson.

The Left-Greens are more cautious about EU membership than the Social Democrats. Sigfusson has also struck a populist note and called for new negotiations with the International Monetary Fund (IMF) on a multi-billion-dollar loan.

While Iceland needs the cash to rebuild its financial system, the aid has come at a cost. Among other things, the IMF pushed Iceland to raise interest rates sharply in November, even as the country's economic woe was spreading.

Protests have become a regular fixture in the usually tranquil nation of 320,000. Polls show both former coalition parties trailing the Left-Greens, suggesting a shift in power is likely in the event of an early election.

The global financial crisis hit the North Atlantic nation in October, ending a decade of rising prosperity by triggering a collapse in the currency and financial system.