* Iceland c.bank cuts key interest rate by 100 bps to 17 pct
* C.bank head says further cuts to come but depends on crown
* Says easing capital controls may take time
(Adds c.bank comment)
By Simon Johnson and Mia Shanley
STOCKHOLM, March 19 (Reuters) - Iceland's central bank eased its key policy rate from a record high on Thursday and said the economy, ripped apart by the collapse of the country's banks, was showing signs of being stable enough for more cuts.
But the central bank's newly appointed chief Svein Harald Oygard said capital controls introduced last year to stabilise the country's shattered currency would only be removed when it could be done without impacting the foreign exchange market.
The 100 basis points reduction to 17.0 percent was the first since rates were hiked in accordance with a bailout plan led by the International Monetary Fund.
"The fundamentals in my view support a continued stability in the crown combined with a gradual easing of monetary policy through 2009 and into 2010," Sedlabanki chief Oygard said at a briefing after the decision.
The central bank will hold an additional monetary policy meeting on April 8, but Oygard said further rate cuts would depend on developments in the crown and in restructuring the failed banks.
Oygard expressed caution about removing currency controls.
"They will only be removed when they can be removed in an orderly manner and ... without having a significant adverse impact on the exchange rate," he said.
The rate decision was the first by the newly appointed interim central bank leadership after the former board, led by former prime minister David Oddsson, was pushed out by the current government, also a caretaker administration.
CRUNCH
The global crisis has hit Iceland hard. Its currency collapsed and its main banks failed last year under the weight of huge debts taken on to finance rapid overseas expansion.
Unlike countries like Britain, Iceland's government did not have enough money to bail out its financial firms with public cash when the credit crunch bit.
After years of high-living, Icelanders now face lean times as businesses go bankrupt, unemployment soars and imported items shoot up in price.
The IMF has led a $10 billion financial aid package to steer Iceland out of its crisis, but the economy is likely to contract by more than 10 percent this year.
Analysts had expected the Sedlabanki to ease rates after the IMF said last week the country had made progress in fixing its broken financial system, taming inflation and stabilising its currency.
Mats Olausson, chief strategist emerging markets at SEB said the central bank would only move gradually to lower interest rates, and only do that on condition the currency remained stable.
He said Icelandic authorities would want to move faster, but that the IMF would be more focused on capital controls.
"This is going to be a balance between these two measures and ultimately the IMF will have a big say in the tempo for these two processes," he said.
Olausson said the central bank could announce some easing in capital controls at its next meeting.
Reuters monitors Iceland interest rate decisions via the Internet from its Stockholm bureau. (Reporting by Niklas Pollard, Mia Shanley, Simon Johnson, editing by Mike Peacock/Victoria Main)