Iceland's ruling coalition collapsed on Monday under the pressures of the country's financial meltdown, the first government to fall as a direct result of the global economic crisis.
Prime Minister Geir Haarde said he would hand in his resignation to President Olafur Ragnar Grimsson after talks to save his government failed.
The global financial crisis hit Iceland in October, ending a decade of rising prosperity in a matter of days by triggering a collapse in the currency and financial system.
Mr Haarde's government, a coalition between his Independence Party and the Social Democratic Alliance, has been under pressure since then. Protests, sometimes violent, have called for his government's resignation.
Mr Haarde had already said on Friday he would not seek re-election because he has cancer, and had proposed an early parliamentary election in May. He had wanted to keep running Iceland until the vote.
Jubilant protesters honked horns and banged pots and pans outside Iceland's Althing parliament after the news the government had fallen.
Iceland's commerce minister, Bjorgvin Sigurdsson, 38, had resigned on Sunday saying it was because of his role in the financial cave-in.
Mr Sigurdsson and the Financial Supervisory Authority oversaw the nationalisation of Iceland's three main banks, which all crumbled under a mountain of foreign debt in the global credit crunch.
He said the chairman of the Financial Supervisory Authority and its director would also resign.