Iceland's government was last night scrambling to avoid becoming the first administration to be ousted by the global financial crisis, as ministers huddled to try and hold together a coalition in the face of some of the biggest protests the country has seen for 60 years.

Protesters who have mounted vocal demonstrations in recent weeks against the collapse of the economy squared up to police, spattered parliament with eggs and paint, and at one point surrounded the prime minister's car as he tried to leave his office.

They pelted Geir Haarde's car with eggs and banged on the windows, shouting "resign", in a sign of mounting exasperation at the government's failure to prevent the economy from imploding under a mountain of billions of dollars of debt.

"These men bankrupted Iceland. It's ridiculous that they continue as if nothing happened," the writer Hallgrimur Helgason said. "I want the government to resign and an emergency government to be proclaimed, preferably made up of women. They can't do worse than men."

Haarde's press secretary said some demonstrators "came quite close to him and they didn't look all that peaceful".

Last night, the government's supposed political ally, the Alliance party, was meeting to discuss the future of the coalition. Options on the table included a motion calling for early elections, or even a vote of no confidence in the government.

After fleeing the government building, Haarde went to a meeting of Independence party MPs at their headquarters. He later emerged to insist that he could hold the coalition together.

Protesters have been rallying outside the parliament since October, when the credit crunch ripped the heart out of Iceland's financial system.

The protesters have begun referring to their daily attempt to oust the government as a "fleece revolution", because of the sweaters worn.

After a midwinter hiatus, several hundred protesters returned en masse on Tuesday, as parliament was preparing to return from recess. Some clashed with police who used pepper spray and batons to drive them back.

"The USA is getting rid of Bush today, we want to get rid of you" and "Yes, we can" were among banners carried by thousands of protesters.

The protesters banged pots and pans, wheelbarrows and a drum set. "We are protesting against useless ministers," said one of three ladies who were beating teapots with spoons. They, like many others, had taken time off from work. "We are taking a long lunch break," they said.

The latest protest rally is thought to be the biggest since 1949, when Iceland joined Nato. On Tuesday night, the crowds lit a bonfire and once it ran out of fuel, the Christmas tree in the town square was torn down and used as firewood. Nearby benches were also thrown into the pyre.

Iceland's financial collapse was triggered when a huge housing and consumer bubble burst last year under the weight of foreign debts that at one point amounted to 10 times the country's GDP.

The economy is expected to contract sharply this year and unemployment is soaring.