(Adds details, background)
By Omar Valdimarsson
REYKJAVIK, Feb 8 (Reuters) - Central bank chief David Oddsson refused to step down on Sunday despite calls from the prime minister and the public for him to quit over his role in Iceland's financial collapse.
Oddsson's stand set up a confrontation with the new leadership as it tries to alleviate the economic pain being felt across the North Atlantic island nation of 320,000 people.
Prime Minister Johanna Sigurdardottir had written to Oddsson asking him to leave. But in a letter posted on the central bank's website in Icelandic, Oddsson was defiant.
He said he had personally warned repeatedly of an impending crisis for the banking system.
"It is laughable that a minister...who herself did not lift a finger to try to avoid what was happening is now acting in this way," he said.
"I have never run away from any task I have taken on and will not do so now."
Iceland's financial system collapsed in October after its leading commercial banks failed and trade in its currency virtually ceased. Since then it has received a $10 billion financial aid package led by the International Monetary Fund.
The ramifications have gone beyond the island's shores.
Thousands of foreign investors attracted by high interest rates held savings in the collapsed banks.
On Friday, the British unit of Icelandic investment group Baugur, which owns stakes in several UK high street retailers, was placed into administration.
As prime minister for more than a decade and then as head of the central bank, Oddsson built the foundation for a boom that brought unprecedented wealth to many Icelanders.
Since that came to an abrupt end, Oddsson has been vilified by many politicians particularly from Sigurdardottir's Social Democratic Alliance.
Following violent protests, the coalition government fell apart in late January and was replaced by an interim centre-left government formed by the Social Democrats and the Left-Greens.
OVERHAUL A PRIORITY
Soon after taking office, Sigurdardottir said that overhauling the central bank was a priority.
There was no immediate word from the prime minister's office about how the government would respond to Oddsson. An aide said she had not had time to study the letter.
A bill is currently in parliament that would change the structure of the central bank to have one governor rather than the current three-person board. Oddsson has been the senior member of the board.
One of the three governors, Ingimundur Sigfusson, resigned on Friday and the prime minister told state radio the government would not tolerate the other central bankers remaining.
During his rule, Oddsson pushed through free-market reforms. A former playwright and mayor of Reykjavik, he was also an outspoken opponent of membership of the European Union.
In the wake of financial crisis, many Icelanders have warmed to the idea of joining the bloc with a view to adopting the euro although there is still strong opposition due to the potential impact on Iceland's fishing industry.
(Reporting by Omar Valdimarsson via Stockholm newsroom, writing by Adam Cox; Editing by Angus MacSwan)