BBC NEWS | Europe | Latvian PM quits as crisis bites

Latvian Prime Minister Ivars Godmanis and his centre-right government have resigned, amid turmoil triggered by economic crisis in the Baltic state.

President Valdis Zatlers has accepted the resignations and is beginning talks to try to form a new administration.

The country's economy is in recession and is set to contract by up to 12% in 2009, with unemployment rising by 50%.

Latvia's is the second European government, after Iceland, to fall as a direct result of global economic woes.

Earlier, the two largest parties in Latvia's ruling coalition, the People's Party and the Union of Greens and Farmers, both demanded Mr Godmanis's resignation.

People's Party Chairman Mareks Seglins said it was the only way to help boost public trust in the unpopular government.

A protest over economic policy in the capital, Riga, on 13 January ended in more than 100 arrests. More than 40 people were injured.

Mr Godmanis, a member of the small Latvia's First/Latvia's Way party, then survived a parliamentary confidence vote on 3 February.

Bank bail-out

But on Friday Mr Zatlers announced that the prime minister had submitted his resignation and that it had been accepted.

Mr Godmanis said his position had become untenable after his two main coalition partners had failed to back him earlier in the day.

"I told them this is the moment of truth," he said.

The president said he would hold talks on Monday on a new coalition with leaders from all of the country's political parties.

Correspondents say the new administration will have a difficult task reviving the economy of the country of 2.4 million people.

Latvia's economy has shrunk at its fastest rate since the early 1990s, after it split from the Soviet Union and regained its independence.

Latvia's gross domestic product (GDP) fell 10.5% in the last quarter of 2008, compared with the same period a year earlier. Economists believe GDP could fall as much as 10% this year.

The country had enjoyed several boom years - in 2006 the economy was still growing by 12% a year - but the global credit crunch has hit Latvia hard.

Correspondents say a major reason for the decline was that locally-owned banks, which make up 40% of the Latvian financial system, were taking deposits from abroad and investing them in the booming property market.

When the property market begin to decline and foreign credit dried up, confidence in Latvian banks evaporated.

The second largest bank, Parex, collapsed after depositors panicked and has been largely nationalised.