Several hundred protesters gathered outside the city's main police station to demand the release of a man jailed in a previous demonstration.
Five people were injured when police used pepper spray to disperse the group after some tried to storm the building.
Iceland faces a sharply contracting economy over the financial collapse.
The group outside the police station broke away from a much larger group of several thousand people who had gathered outside parliament to demand the government's resignation.
Some in the group tried to storm the police building.
On a gloomy North Atlantic evening in January, a group of international hedge fund managers gathered in the stylish bar of 101 Hotel in downtown Reykjavik at 8pm for a drink before dinner. They had been flown to Iceland by Bear Stearns, the US investment bank that two months later had to be rescued. Bear had organised the excursion to discuss the bizarre state of Iceland’s economy. What transpired at this dinner has entered into legend within Iceland’s close-knit financial community.
An executive who works with a big Icelandic bank recalls: “Upon entering the bar I was approached by one of the hedge fund managers. He informed me that all people in this party – except for him, of course – were shorting Iceland.” The executive says the fund manager described Iceland’s profit-making potential as the “second coming of Christ”.
“As dinner progressed – some people actually decided not to eat at all but just sit at the bar – and more drinks were downed, the conversation and questions started to get more hostile and short positions openly declared,” the executive says.
What started as an alcohol-fuelled evening has become a full-blown investigation by Iceland’s Financial Supervisory Authority into an alleged speculative attack by hedge funds on Iceland’s currency, banking system and stock market. Jonas Jonsson, director-general of Iceland’s FSA, says the authorities are “searching whether some parties have systematically been distributing negative and false rumours about the Icelandic banks and financial system in order to profit from it”.
what's happened is that the entire government has collapsed and is about to get kicked out.
Iceland's coalition government has collapsed under the strain of an escalating economic crisis.
Conservative Prime Minister Geir Haarde announced the resignation of his cabinet, after talks with his Social Democratic coalition partners failed.
He said he could not accept the Social Democrats' demand to lead the country.
Iceland's financial system collapsed in October under the weight of debt, leading to a currency crisis, rising unemployment and daily protests.
The economy is forecast to shrink by almost 10% this year.
The coalition between Mr Haarde's Independence Party and Foreign Minister Ingibjorg Gisladottir's Social Democratic Alliance had been under strain in recent months.
Mr Haarde told reporters on Monday: "We couldn't accept the Social Democratic demand that they would lead the government."
The Independence Party currently controls 25 of the country's 63 parliamentary seats, to the Social Democrats' 18.
there is a beacon of light, however.
so even though us banks destroyed an entire country's economy, we might at least get to see if a green party can run a country for the first time in history.
Support for the two coalition parties -- Haarde's Independence Party and Gisladottir's Social Democratic Alliance -- has dwindled and is not currently enough to give them a new majority, a poll on Saturday indicated.
The poll put support for the Independence Party, for decades the biggest and most influential party, at 22.1 percent, down from 36.6 percent in the last election, while the Social Democrat Alliance polled 19.2 percent, down from 26.8 percent.
If an election were called now, the opposition Left-Green Party would become the biggest party, with 32.6 percent, more than twice as much as it won in 2007, the survey for Frettabladid indicated.
Support for the other main opposition party, the Progressive Party, partner of Independence in a previous coalition, stood at 16.8 percent, up from 11.7 percent.