REYKJAVIK – Iceland’s Prime Minister Sigmundur David Gunnlaugsson became the first major casualty of the Panama Papers revelations today, stepping down after leaked files showed his wife owned an offshore firm with big claims on the country’s collapsed banks.

The ruling Progressive Party’s deputy leader, Sigurdur Ingi Johannsson, who holds the fisheries and agriculture portfolio, told reporters Gunnlaugsson was stepping down and that the party had proposed to their junior coalition partner, the Independence Party, that he become the new prime minister himself.

The two parties discussed the matter last night, but no agreement was reached. Talks are expected to continue.

The more than 11.5 million documents, leaked from the Panamanian law firm Mossack Fonseca, have caused public outrage over how the world’s rich and powerful are able to stash their wealth and avoid taxes while many people suffer austerity and hardship.

Adding confusion to the political crisis, a statement emailed last night by government spokesman Sigurdur Jonsson said Gunnlaugsson had suggested that Johannsson take over as 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,” it said.

An Iceland government spokesman has said the claims against Iceland’s collapsed banks held by the firm owned by the prime minister’s wife – in which he also temporarily held a stake – totalled more than 500 million Icelandic crowns ($A5.3 million). Gunnlaugson has said his wife’s assets were taxed in Iceland.

His decision to step down came after thousands of Icelanders gathered in front of parliament on Monday, hurling eggs and bananas and demanding the departure of the leader of the centre-right coalition government, which has been in power since 2013.

– with other agencies