"The Prime Minister told (his party’s) parliamentary group meeting that he would step down as Prime Minister and I will take over," the Progressive Party’s deputy leader and Agriculture Minister Sigurdur Ingi Johannsson told a live broadcast.

Gunnlaugsson had yesterday threatened to dissolve Parliament and call new elections if he were to lose the support of his junior coalition partner, following an uproar over his offshore holdings revealed in the Panama Papers.

Poll

Who will win the Punjab Elections?

BJP 32.86%

AAP 41.43%

INC 25.71%

Submit

View All In Poll

"I told the leader of the Independence Party that if the party’s parliamentarians think they can not support the government in completing joint tasks, I would dissolve Parliament and call a general election," Gunnlaugsson wrote on his Facebook page.

However, President Olafur Ragnar Grimmson refused the request.

Gunnlaugsson, a former journalist, had resisted mounting pressure to step down after the leaked documents showed that he and his wife bought a company in the British Virgin Islands in 2007. He sold his 50 per cent share to his wife Anna Sigurlaug Palsdottir for a symbolic sum of $1 in 2009.

But when he was elected to Parliament for the first time in April 2009, as a member of the Progressive Party, he neglected to mention his stake in his declaration of shareholdings.

Huge crowds had gathered outside Parliament late Monday, demanding that Gunnlaugsson quit.

Police said the crowds outnumbered the thousands who in 2009 brought down the right-wing government over its responsibility in Iceland’s 2008 banking collapse.