REYKJAVIK—Some 3,500 people gathered outside the parliament in Reykjavik Monday to protest the Icelandic government's backtracking from its election promise to hold a national referendum on whether to seek EU membership, a move also creating friction within the coalition government that has been in power for less than a year.

The protest meeting was called after the two parties leading the government coalition said Friday the small island nation will withdraw its EU membership application without holding a referendum on the...