* Iceland PM is victim of leaks scandal

* Opposition seeking early election

* Icelanders to hold street protests (Adds Pirate Party leader, detail)

REYKJAVIK, April 6 (Reuters) - Iceland’s government sought to avoid early elections on Wednesday by picking a replacement for the prime minister who stepped aside to become the first global politician brought down by the “Panama Papers” leaks.

Sigmundur David Gunnlaugsson exited on Tuesday after leaked documents from a Panamanian law firm showed his wife owned an off-shore company that held millions of dollars worth of debt from failed Icelandic banks.

Picking a new prime minister could allow the ruling coalition to remain in power, but the opposition is trying to force a new election with a vote of no confidence in the government, which could lead to a radical political shift.

Icelanders, already fed up with the financial and political elite after the 2008 banking crisis wrecked the economy, were expected return to the streets on Wednesday. Protesters pelted parliament with yoghurt and eggs earlier this week.

“I feel like I am watching a live show of House of Cards,” said Erla Gisladottir, a 32-year-old mother on parental leave.

Polls show the anti-establishment Pirate Party in the lead if a new election is called in the country of 330,000 people, a result with potentially wider impact across Europe where mainstream political parties are fending off populists.

“We must have a snap election,” Pirate Party leader Birgitta Jonsdottir told Reuters in an interview.

“There has been tremendous damage to the reputation of Iceland with this circus.”

The Panama documents revealed that Gunnlaugsson’s wife owned a previously undisclosed firm with what the government says is $4.1 million in claims on the island’s collapsed banks. His opponents say that represents a conflict of interest, because the government is negotiating the value of such claims.

Iceland has struggled to recover from the 2008 collapse of its highly indebted banks, which led to protests, the fall of a government and the jailing of many bankers.

The ruling Progressive Party’s deputy leader, Sigurdur Ingi Johannsson, said on Tuesday his party had proposed to its coalition partner, the Independence Party, that he become the new prime minister. That requires a formal decision by the government, which was expected to meet later on Wednesday.

However, there were signs a transition would not be smooth. 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.

ELECTION DEMANDS

Opposition politicians are standing their ground, calling for a vote of no-confidence. While the government has a parliamentary majority, it is not clear whether all its members would now support it.

“It is clear our demand for new elections still stands,” Left Green Party leader Katrín Jakobsdottir told Reuters late on Tuesday.

The Pirate Party’s Jonsdottir said her party was still seeking confirmation Gunnlaugsson had relinquished power on a permanent rather than temporary basis.

“The majority asked us if we would be willing to delay our vote of no confidence until the situation is clarified. But we will not wait longer than later today,” she said.

Nevertheless, some experts predicted the government would hang on.

“Unless something very unexpected happens, it seems likely to me that this government has survived and will continue and hope that this dies down,” said Stefania Oskarsdottir, associate professor in political science at Iceland University.

A poll by Icelandic media outlet Visir showed 43 percent would vote for the Pirate Party if elections were held now, a stunning victory for an anti-establishment group set up by opponents of copyright enforcement rules.

The Pirate Party, which campaigns in favour of transparency and direct democracy, has had a small following in several European countries for a few years but has never before come close to political power.

Elections are not scheduled to take place for a year, although many believe one could be called sooner.

Oskar Arni Oskarsson, a 64-year-old writer and librarian, called the turn in Icelandic politics “totally absurd” and wanted a new vote.

“I think we have just scratched the surface,” he said. “I think a lot of things will still emerge.”

The leaked documents from a Panamanian law firm that specialises in setting up offshore companies were unveiled this week by news organisations around the world, shining a light on the finances of global politicians and public figures.

Gunnlaugsson and his wife bought a company called Wintris Inc from the Panamanian law firm Mossack Fonseca in late 2007 through the Luxembourg branch of Landsbanki, one of the three Icelandic banks that collapsed in 2008.

Court records show Wintris had investments in bonds in all three of those banks, according to the International Consortium of Investigative Journalists, which coordinated the leaks investigation. It said Gunnlaugsson sold his 50 percent share in Wintris to his wife for $1 on Dec 31, 2009, the year he entered parliament, and violated Iceland’s ethics rules by failing to disclose it.

In a Facebook post on March 15, his wife Anna Sigurlaug Palsdottir said she was the sole owner of Wintris’s assets, and that her husband had been listed as co-owner due to a mistake by the bank, which she said was corrected in 2009. The money came from the sale of her share in her family’s business, she said.

Gunnlaugsson has said his wife’s assets were taxed in Iceland.

The estates of the failed banks agreed with Iceland’s central bank and finance ministry late last year on how to wind down their business ahead of lifting Iceland’s capital controls. Glitnir said in December it had begun paying creditors, whereas Britain got its final payment from the estate of Landsbanki in January. It was not clear whether Wintris was among those creditors who had been paid. (writing by Mia Shanley and Niklas Pollard, additional reporting by Johan Ahlander, Sven Nordenstam and Daniel Dickson in Stockholm and Gwladys Fouche in Oslo; editing by Alistair Scrutton, Peter Graff and Giles Elgood)