In quitting the ruling coalition just nine months after it came to power, the Bright Future party cited a “serious breach of trust” with Bjarni Benediktsson’s party over an alleged cover-up.
It follows claims the PM’s Independence Party tried to conceal a letter written by his father Benedikt Sveinsson to help a friend convicted of child sex offences get his criminal record wiped clean.
Although the justice minister Sigridur Andersen, of the Independence Party, told the prime minister of the letter in July, the government did not reveal its existence until a parliamentary committee forced it to a few days ago.
Mr Sveinsson’s friend Hjalti Sigurjon Hauksson was sentenced to five years in prison in 2004 for repeatedly raping his stepdaughter for 12 years since she was five.
Mr Sveinsson has confirmed he signed a letter supporting his friend’s application to have his “honour restored” by Iceland’s judicial system.
The legal procedure restores the “civil standing” of people convicted of offences and requires a recommendation from a close friend.
The prime minister told reporters: “We have lost the majority and I don’t see anything that indicates we can regain it. I am calling an election.”
He confirmed president Gudni Johannesson had accepted his request.
The outgoing government would be the shortest-living in Iceland’s history.
The country’s previous government was toppled by the Panama Papers scandal over offshore tax havens.
Iceland’s economy was wrecked by the collapse of its banking system nearly a decade ago during the 2008 financial crisis.
Mr Benediktsson told Sky News this week that the UK should have taken stronger action against bankers involved in the financial crisis and he was surprised that it had not followed his country’s example jailing senior bankers.