REYKJAVIK - ICELAND is prepared to consider a variety of options to solve its currency problems, including the possibility of adopting the euro without joining the European Union, Prime Minister Geir Haarde said on Saturday.

Mr Haarde said the financial crisis which has ravaged the nation's banking system and the Icelandic crown has underscored the pitfalls of managing a currency in a small, open economy.

'People are looking into the possibility of 'dollarisation', or unilateral adoption of the euro, which would probably raise a lot of eyebrows in the European Union, and a third possibility might be a currency board,' he said in an interview.

'This is an open question at the moment,' he added.

The European Central Bank has made clear it opposes any attempts by countries to adopt the euro without going through the normal process, which first requires joining the EU.

Mr Haarde's comments came as public anger at the government intensified. Some 5,000 people - roughly 1.5 per cent of the country's population - demonstrated in Reykjavik on Saturday demanding Haarde and his government resign.

Iceland's 320,000 residents are staring at a protracted period of economic hardship. The economy is expected to contract 10 percent next year, unemployment is set to soar, and consumer confidence has plummetted.

Iceland is not in the EU, but Mr Haarde's party has pledged to re-evaluate the merits of membership after the financial crisis hobbled the once-booming North Atlantic island economy, forcing the government to take over the top three commercial banks and limit capital flows to keep the crown from weakening further.

Recent opinion polls show Icelanders warming towards EU membership and, in even greater numbers, backing euro adoption.

Mr Haarde said that if Reykjavik decided to join the EU, it may take two years to become a member and at least three more to adopt the euro if it were to follow guidelines.

'Clearly, this debate (about EU membership) is not the answer to the current crisis,' said Haarde, whose Independent Party has so far been sceptical of membership.

However, Mr Haarde said meeting Maastricht budgetary criteria, which are the gateway to adopting the euro, was 'sensible policy' regardless of whether Iceland joined the EU.

Protests mount
For now, Mr Haarde's top priority will be to stabilise the crown, whose fall has boosted inflation, forced up domestic interest rates and raised the costs of foreign funding. Trade in the crown has effectively stopped on international markets.

Iceland this month secured $10 billion (S$15.1 billion) of financial assistance, including a $2.1 billion loan from the International Monetary Fund (IMF) to shore up the fragile economy.

Iceland passed legislation this week to curb currency flows and the central bank said the relaxation of these restrictions would take place in stages to prevent a fresh currency collapse.

'We're in a critical period,' Mr Haarde said, calling the crown 'significantly undervalued'.

'It's reassuring for outside observers that this is all done with the IMF. We are not experimenting on our own.'

Mr Haarde repeated that he would not call early elections.

While the government may be able to fend off the opposition for now, public anger shows no sign of abating. Braving freezing temperatures and strong winds, residents packed into a central square holding signs demanding the government resign.

'We want the government which promoted this 'shark capitalism' to quit,' protester Stefan Jonsson said. 'Nobody has taken responsibility for this or even said they are sorry.' -- THOMSON REUTERS