Prime Minister Geir Haarde has called an election for May and says he'll step down due to illness.
But it's not clear whether the government can continue until May.
Haarde's coalition partner Ingibjorg Gisladottir is threatening to withdraw from the government. Her party wants Haarde to sack the central bank governor — ex-Prime Minister David Oddsson — and commit Iceland to closer ties to Europe.
Haarde says he expects the fate of his government to be sealed Monday.
If the coalition collapses, it's likely opposition parties would form a new ruling coalition until May.
Icelanders have joined noisy daily protests over rising unemployment and soaring prices.