Panama Papers: Confusion surrounds Iceland PM's 'resignation'

Having been refused permission to dissolve parliament on Tuesday by President Olafur Ragnar Grimsson, Gunnlaugsson then said he was resigning only for one of his aides to deny this hours later.

According to a statement, Gunnlaugsson had only asked the vice-president of his Progressive Party “take over the office of Prime Minister for an unspecified amount of time”.

“The prime minister has not resigned and will continue to serve as chairman of the Progressive Party.”

Gunnlaugsson requested the dissolution of parliament after leaked documents revealed he had owned an offshore firm which held bonds in the three Icelandic banks that collapsed in the financial crisis.

He sold the firm to his wife who was still the owner, according to documents leaked from Panamanian law firm Mossack Fonseca.

Grimsson told a news conference on Tuesday he would not grant the prime minister's request on the basis of Gunnlaugsson using the threat of dissolving parliament "as a bargaining chip in his negotiations with his coalition partner".

"What the president must consider under these circumstances is whether the parties which form the governing majority in parliament support the decision, and whether the dissolution of parliament is likely to be beneficial to the nation and the governance of the country," he said.

"He could not assure me of the (coalition member) Independence Party’s stand regarding this matter. In light of this I explained to him that I was not ready to grant him his request to dissolve parliament at this time, or at least without having first discussed the matter with the head of the Independence party, or others."