Iceland's prime minister has resigned following massive protests in the wake of the Panama Papers investigation which revealed how the world's wealthy avoid tax.

Sigmundur Gunnlaugsson stepped down on Tuesday hours after thousands of protesters gathered outside parliament to demand his resignation.

Agriculture Minister Sigurdur Ingi Johannsson - who will replace the prime minister for an interim period - confirmed to Icelandic broadcaster RUV that Gunnlaugsson was stepping down as leader of the country's coalition government.

Gunnlaugsson is the first major scalp from a leak of more than 11 million documents from Mossack Fonseca, a Panamanian law firm, showing tax-avoidance arrangements of the rich and famous around the world.


READ MORE: Panama Papers - Why should we care?


Gunnlaugsson was among the names mentioned in the so-called Panama Papers, which were published on Sunday.

The leaked documents allege that Gunnlaugsson and his wife set up a company called Wintris in the British Virgin Islands with the help of the Panamanian law firm.

Gunnlaugsson is accused of a conflict of interest for failing to disclose his involvement in the company, which held interests in failed Icelandic banks that his government was responsible for overseeing.

Panama Papers: Huge leak alleges elites hiding money

The leader quit ahead of a planned vote of no confidence, hours after asking the president to dissolve parliament, a move which would almost certainly have led to a new election.

Despite his resignation, opposition parties continued their call for a snap election.

Iceland, a volcanic North Atlantic island nation with a population of 330,000, was rocked by a prolonged financial crisis when its main commercial banks collapsed within a week of one another in 2008.

Since then Icelanders have weathered a recession and been subjected to tough capital controls - another reason the prime minister's offshore holdings rankle many.

"He [Gunnlaugsson] is the first casualty of the Panama Papers," said Al Jazeera's Laurence Lee, reporting from Reykjavik. "Iceland is clearly a functioning democracy. People have said they're not prepared to put up with it. As soon as it [the leak] started to come out on Sunday, people took to the streets."  

Panama Papers

The International Consortium of Investigative Journalism (ICIJ), a non-profit group in the US, said the cache of 11.5 million records detailed the offshore holdings of a dozen current and former world leaders, as well as businessmen, criminals, celebrities and sports stars.

Elsewhere among the sitting world leaders named in the leak are Argentine President Mauricio Macri and Ukraine's President Petro Poroshenko.

The documents link at least 12 current and former heads of state and 143 other politicians to illicit financial transactions.

Mossack Fonseca, the law firm at the centre of the leak, rejected wrongdoing.


READ MORE: Huge leak alleges elites hiding money


"These reports rely on supposition and stereotypes, and play on the public's lack of familiarity with the work of firms like ours," it said late Monday.

In a four-page document, the law firm reiterated that it had "never been accused or charged in connection with criminal wrongdoing".

The publication of the data reignited the debate over how the world's wealthy make use of tax-avoidance schemes not available to most of the world's population.

Global fallout

The Panama Papers were the result of a year-long, worldwide investigation.

Among those involved are friends of Russian President Vladimir Putin; the family of Pakistani Prime Minister Nawaz Sharif; the brother-in-law of Chinese leader Xi Jinping; the football star Lionel Messi; the father of British Prime Minister David Cameron; as well as Oscar-winning Spanish film director Pedro Almodovar - who on Tuesday cancelled a press junket because of the controversy.

US President Barack Obama said on Tuesday that the revelations that powerful international politicians and businessmen have hidden money in shell companies shows that tax avoidance is a global issue.

He said wealthy individuals and corporations are "gaming the system" by making use of tax code loopholes that average taxpayers do not have access to.

He also labelled "insidious" the growing practice of US companies merging with foreign firms just to cut their tax liabilities.

Panama Papers fallout felt in Pakistan

Source: Al Jazeera and agencies