Jan. 23 (Bloomberg) -- Iceland will hold early parliamentary elections on May 9 after the island’s economic collapse sparked protests directed against Prime Minister Geir Haarde’s government.

Haarde, 58, won’t seek re-election as chairman of the Independence Party, the biggest partner in the ruling coalition, he said on broadcaster RUV today, adding that he has been diagnosed as having a malignant tumor requiring treatment outside the country.

“The Independence party must be expecting a blow to their support,” said Gunnar Helgi Kristinsson professor of political science at the University of Iceland. “The lowest support they have had historically is 27.2 percent in 1987. In recent polls support has been measuring at 24 percent.”

Police this week used tear gas and clubs to break up the latest in a series of demonstrations called by citizens demanding the resignation of the government, officials at the central bank and the Financial Supervisory Authority. The country, the fifth- richest in the world per capita in 2007, was forced to ask the International Monetary Fund for a bailout in October following the failure of its banks and the collapse of its currency.

Haarde, who earlier this week had his car pelted with eggs, said he will do cooperate with other parties “to ensure preparations for elections don’t disrupt the economic program we are currently working on in cooperation with the IMF.”

Iceland’s gross domestic product will contract 9.6 percent this year, the IMF has estimated, its biggest economic slump since World War II and since winning independence from Denmark in 1944.

‘Considerable Risk’

“There’s a considerable risk that a new government will be populist and interventionist,” said Lars Christensen, chief analyst at Danske Bank A/S in Copenhagen. “That would roll the economy back to the 1970s, when they were unable to generate growth.”

Support for the ruling coalition dropped more than 10 points in the past month, according to a poll by Market and Media Research published yesterday. Haarde’s coalition had 24.2 percent support, compared with 34.5 percent in December, the poll showed. Market and Media Research interviewed 1,749 voters on Jan. 20-21.

“In the current situation the Left Green party is likely to be the winner of the next elections,” said Kristinsson. “They have been measuring high in polls and are likely to double their following since the last elections.”

At the last parliamentary elections in May 2007, the Independence Party won 25 seats in the Althingi and has ruled in a coalition with the Social Democrats, which gained 18 seats. The main opposition parties, the Left Green Party and the Progressive Party, won 9 and 7 seats respectively.

Steingrimur Sigfusson, leader of the Left Greens, said in an October interview he’s ready to lead the country and predicted then a return to more government control.

Bank Failures

The government took over the island’s three biggest banks, Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf, in October after they were unable to fund their operations. The failure of the banks, whose total debt was about 10 times the size of the economy, precipitated the collapse of the currency, which slumped as much as 70 percent last year against the euro.

The IMF has agreed to lend Iceland $2.1 billion to help rebuild the economy, with an additional $2.7 billion in loans coming from the Nordic countries and Poland. Iceland is also borrowing about $6.3 billion from the U.K., Germany and the Netherlands to cover foreign deposit guarantees at Landsbanki.

“I don’t even want to think about the possibility that a new populist government might toy with the idea of defaulting on those loans,” Christensen said.

To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net;

Last Updated: January 23, 2009 11:12 EST