The conservative Independence Party, in power for 18 years until it resigned in January amid huge protests over the financial crisis that brought Iceland to the brink of bankruptcy, posted its worst election score. Party leader Bjarni Benediktsson, conceding defeat having won just 23.7 per cent of votes, far below the conservatives' previous all-time low of 27 per cent in 1987 said, ''We lost this time but we will win again later.''

Prime Minister Johanna Sigurdardottir of the pro-EU Social Democratic Party campaigned heavily on leading Iceland into the European Union and will now have to try to reach an agreement with coalition partner Left Green Movement.

The Social Democrats won 29.8 per cent of votes and the Left Greens 21.7 per cent, final results showed yesterday, giving the coalition an absolute majority of 51.5 per cent, a first for a left-wing government.

Ms Sigurdardottir, a 66-year-old, openly gay feminist, told supporters, ''Our time has come.''

Iceland was one of the most prosperous countries in the world until late last year, when the global financial crisis led to the collapse of its financial sector. The state had to take control of the three main banks in October, as the currency, the krona, lost 44 per cent of its value.

Unemployment, which was virtually non-existent, is likely to hit 10 per cent by the end of 2009 as the economy shrinks 10 per cent, and inflation is about 15 per cent.

AFP