Reykjavik: Icelandic Prime Minister Sigmundur David Gunnlaugsson resigned on Tuesday, becoming the first casualty of leaked documents from a Panamanian law firm which have shone a spotlight on the offshore wealth of politicians and public figures worldwide.

The Panama Papers showed the premier's wife owned an offshore company with big claims on Iceland's banks, a undeclared conflict of interest for Mr Gunnlaugsson, infuriating many who hurled eggs and bananas in street protests calling for him to step down.

Sigmundur Gunnlaugsson. Photo: Bloomberg

The banks collapsed as the global financial crisis hit in 2008 and many Icelanders blame politicians for not reining in their debt-fuelled binge and averting a deep recession.

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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.

Mossack Fonseca, which specialises in setting up offshore companies, denies any wrongdoing. On Tuesday, the Panamanian government sought to defend the country's reputation.

Thousands of people demonstrate against Iceland's prime minister, in Reykjavik on Monday. Photo: Brynjar Gunnasrson

Panama President Juan Carlos Varela's chief of staff told a news conference that the government could retaliate after France announced it would put the Central American country back on its blacklist of uncooperative tax jurisdictions. The official, Alvaro Aleman, said that no Panamanian company had been found to have committed a crime.

He added: "We are not going to allow Panama to be used as a scapegoat by third parties. Each country [implicated] is responsible." The president had instructed the foreign ministry to contact all of the dozens of countries implicated, Mr Aleman said.

Among those named in the documents are friends of Russian President Vladimir Putin, relatives of the leaders of China, Britain and Pakistan, and the president of Ukraine.

A picture mimicking Sigmundur Gunnlaugsson near the Icelandic Parliament building in downtown Reykjavik. Photo: Getty Images

Mr Gunnlaugsson quit ahead of a planned vote of no-confidence, hours after asking the president to dissolve parliament, a move which would almost certainly have led to a new election. His request was declined by the country's president.

The deputy leader of his Progressive Party, Sigurdur Ingi Johannsson, who holds the fisheries and agriculture portfolio, told reporters Mr 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 on Tuesday evening local time but no agreement was reached. Talks are expected to continue.

The leaked documents from a Panamanian law firm that specialises in setting up offshore companies have shone a light on the finances of politicians and public figures from around the world, causing public outrage over how the powerful are able to hide money and avoid tax.

Adding confusion to the political crisis, a statement emailed on Tuesday 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.

Opposition parties said, however, that they still wanted a snap general election. Any new election could see victory for the anti-establishment Pirate Party, according to opinion polls the most popular in Iceland.

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 ($4.1 million). Mr 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.

Opposition politicians, pushing for fresh general elections, also filed a motion of no-confidence in Mr Gunnlaugson and the government on Monday. The parliamentary vote could still take place this week and could trigger elections if the motion is carried.

"It is clear our demand for new elections still stands," Left Green Party leader Katrín Jakobsdottir told Reuters.

But Finance Minister Bjarni Benediktsson, from the Independence party, said he hoped the coalition would continue.

Mr Gunnlaugsson's opponents say he should have been open about the overseas assets and the company, and that he had a conflict of interest because the government is involved in striking deals with claimants against the bankrupt banks.

'Abuse must stop'

With the fallout from the leaks reverberating across the globe, British Prime Minister David Cameron also came under fire from opponents who accused him of allowing a rich elite to dodge their taxes.

The leader of the UK opposition Labour Party demanded that the government tackle tax havens, saying it was time Mr Cameron stopped allowing "the super-rich elite" to dodge taxes.

"There cannot be one set of tax rules for the wealthy elite and another for the rest of us," Labour leader Jeremy Corbyn said. "The unfairness and abuse must stop."

He said Britain had a huge responsibility since many tax havens, such as the British Virgin Islands and Cayman Islands, are British overseas territories, while others such as Jersey or the Isle of Man are British crown dependencies.

According to media that have seen Mossack Fonseca's files, more than half of the 200,000 companies set up by the firm were registered in the British Virgin Islands, where details of ownership do not have to be filed with the authorities.

Mr Cameron has cast himself as a champion in the fight against tax evasion in British-linked territories. But he was put on the spot by the leaks, which named his late father and members of the ruling Conservative Party among the list of clients who used Mossack Fonseca's services.

Cameron said he did not own any shares or have offshore funds.

"I have a salary as prime minister, and I have some savings, which I get some interest from, and I have a house," he said. "I have no shares, no offshore trusts, no offshore funds, nothing like that."

Other leading figures and financial institutions responded to the leak with denials of any wrongdoing as prosecutors and regulators began a review of the investigation by the U.S.-based International Consortium of Investigative Journalists (ICIJ) and other media organisations.

Britain, France, Australia, New Zealand, Austria, Sweden and the Netherlands are among nations that have started inquiries.

French Finance Minister Michel Sapin said Paris would put Panama back on its blacklist of uncooperative tax jurisdictions. The Central American nation is one of the most secretive of the world's offshore havens and has refused to sign up to a global transparency initiative.

Mossack Fonseca's Hong Kong office said on Tuesday the firm had never been charged with or formally investigated for criminal wrongdoing in its nearly 40 years of operation.

"We do not advise clients on how to operate their businesses. We don't link ourselves in any way to companies we help incorporate," the firm said in a statement.

"Excluding the professional fees we earn, we don't take possession of clients' money, or otherwise have anything to do with any of the direct financial aspects related to operating these businesses."

'Groundless accusation'

The reports also pointed to offshore companies linked to the families of Chinese President Xi and other powerful figures.

Chinese Foreign Ministry spokesman Hong Lei, when asked if the government would investigate tax affairs of those mentioned in the documents, told reporters the ministry would not comment on "these groundless accusations".

Beijing also moved to limit local access to coverage of the matter. State media denounced Western reporting on it as biased against non-Western leaders.

The Hong Kong government said its tax department would take "necessary actions" based on any information it received.

Credit Suisse and HSBC, two of the world's largest wealth managers, dismissed suggestions they were actively using offshore structures to help clients evade tax.

Both were among the banks that helped set up complex structures that make it hard for tax collectors and investigators to track the flow of money, according to ICIJ.

The famous personalities drawn into the affair also included soccer star Lionel Messi. Spanish tax authorities said they are investigating allegations of tax irregularities involving Barcelona's Argentinian striker after the release of the documents.

Messi's family released a statement denying wrongdoing and saying it "never used the company" involved in the matter.

Reuters