REYKJAVIK (Iceland) - ICELAND'S prime minister said he has no intention of stepping down over his country's economic meltdown even as thousands of angry citizens demanded his resignation during a noisy protest outside parliament.

Mr Geir H. Haarde said on Saturday he intended to lead Iceland through a crisis that has seen the spectacular collapse of the island's high-flying 'Nordic tiger' economy - and which he predicted would worsen next year.

'I think it's inevitable that we will have a severe drop in GDP, in purchasing power, in employment,' Mr Haarde said.

He said 2009 'will be a very difficult year for us'.

A crowd of 4,000 to 5,000 people gathered in the bitter cold outside the tiny stone building that houses Iceland's parliament, demanding elections for a new government. Many expressed a sense of shock and betrayal at their country's sudden fall from grace.

Just last year, this volcanic island on the edge of the Arctic Circle topped a United Nations 'best place to live' poll. But last month Iceland's three major commercial banks collapsed under the weight of huge debts amassed during years of rapid economic growth.

Since then the value of Iceland's currency, the krona, has plummeted, businesses have gone bankrupt and hundreds of people are losing their jobs each week in this nation of 320,000 people.

'Everything's gone to the dogs,' said protester Hilmar Jonsson.

To illustrate the point, he came to the demonstration accompanied by a Labrador, two Chihuahuas and a silky terrier, all decked out in sweaters of the red, white and blue Icelandic flag.

Anti-government protests that began eight weeks ago have grown larger and angrier, and draw a wide cross-section of Icelandic society. Saturday's crowd included everyone from anarchists in ski masks to young families and retirees.

A few protesters set off fireworks behind parliament, while another - dressed as a black-masked Santa Claus - dumped a bag of potatoes on the building's doorstep as a symbol of Iceland's looming penury.

But there was no repeat of the violence seen last week, when several hundred protesters scuffled with police as they tried to storm a police station to free an arrested demonstrator.

'I can understand that people are angry and frustrated with the situation that has developed here,' Mr Haarde said during an interview at his office in central Reykjavik. 'But as far as I personally am concerned I look at it as my main objective and my main challenge now to lead the country through the crisis.'

Many Icelanders blame Mr Haarde's government for failing to regulate the banks properly.

Mr Haarde said blame rested with commercial bankers who expanded recklessly in the wake of a mid-1990s stock market boom.

'I don't feel personally responsible,' he said.

Mr Haarde said a criminal investigation was under way to determine whether Iceland's bankers were guilty of wrongdoing.

'If people broke the law of course they will be prosecuted,' he said.

Despite the resignation calls, on Monday Mr Haarde's government easily survived a no-confidence vote in Iceland's parliament, the Althingi. He does not need to call elections until 2011.

Mr Haarde said the result of the confidence vote proved he had the mandate to take the country through its period of economic shock therapy.

Iceland has been given some $10 billion (S$15.1 billion) in loans from the IMF and individual countries, but faces a bill potentially in the billions to repay hundreds of thousands of people across Europe who had accounts with subsidiaries of collapsed Icelandic banks.

Over the last five years, Iceland has seen average family incomes surge by 45 per cent. With mounting debts, rising unemployment and a falling krona, that trend has gone into rapid reverse.

Mr Haarde predicted economic recovery in 2010, saying Iceland's strong economic fundamentals - including robust fishing and tourism industries and a highly educated work force - would see the country through.

'I believe that as we move through next year into 2010 we will see a much brighter picture, with positive economic growth, less unemployment,' he said. 'But it will take time.' -- AP