* New chief Oygard says strengthening currency top priority
* Has prior experience in Norwegian government
* Analysts applaud technocrat posting amid political storm
* Move follows central bank revamp that ousted Oddsson
(Adds analyst quote, details)
By Wojciech Moskwa
REYKJAVIK, Feb 27 (Reuters) - Iceland picked a little-known Norwegian economist on Friday to be caretaker head of its central bank, as the island tries to recover from the collapse of its banking system and currency.
The government named Svein Harald Oygard interim Governor of Sedlabanki, Iceland's central bank, and the bank's hitherto chief economist Arnor Sighvatsson as his deputy.
The former Norwegian assistant finance minister and more recently McKinsey consultant replaces political veteran David Oddsson, who many Icelanders blame for failing to do more to prevent Iceland's economic meltdown last year.
Oygard is seen as a technocrat who could help restore central bank credibility after a politicised feud between Oddsson -- a former conservative prime minister -- and Iceland's centre-left government.
"Our main priority is to strengthen the Icelandic currency and the monetary system," Oygard, the first ever foreign governor of Iceland's central bank, told a news conference.
"We will also support bank restructuring efforts that will provide (a) better framework for business," said Oygard, who also worked for Norway's central bank.
He declined to say when capital controls, intended to support the island's fragile currency, would end.
Iceland's economy imploded as the global credit crunch left its banks unable to service the billions of dollars of debts they built up during years of overseas growth.
The Atlantic island nation stayed afloat with $10 billion in aid from the International Monetary Fund and other lenders but after mounting public protests, the conservative government resigned last month and elections have been called for April 25.
NO POLITICAL AGENDA
The protests were in part directed at Oddsson, Iceland's longest serving prime minister from 1991 to 2004, who helped create the highly leveraged economic model that came crashing down when global liquidity dried up last October.
"There has been some criticism surrounding Oddsson's credibility given his political past, so in that sense hiring someone who doesn't have any obvious political agenda or history in Iceland seems quite reasonable," Frosti Olafsson, deputy head of Iceland's Chamber of Commerce, told Reuters.
Oygard was appointed after parliament passed a bill on Thursday reforming the central bank and effectively ousting Oddsson after he defied government calls for a resignation.
Oygard is expected to stay on for several months, while Iceland sets up a Monetary Policy Committee and looks for a full-time replacement.
The current interim coalition, which took power earlier this month, had made reforming the central bank a priority.
"I am convinced that this legislation will prove to be a major factor in re-establishing confidence in the bank and the Icelandic financial system as a whole," Prime Minister Johanna Sigurdardottir told Reuters.
"Furthermore, the legislation provides for a much needed degree of professionalism in the selection of governors and the creation of the Monetary Policy Committee to handle strategic decision making is also a significant step."
Oygard said his new role was "one of the greatest challenges" for an economist and the forecasts are daunting, with Iceland's gross domestic product expected to shrink by 10 percent this year.
"Even though Iceland is now a symbol of the financial crisis, my hope is that through our joint efforts, it will also be a symbol of a country able to regain momentum and establish new growth."
Separately, Iceland's government said on Friday a swap of foreign assets held by the country's pension funds for local currency bonds held by foreign investors is one option it is mulling for stabilising its financial system.
Iceland has said foreign investors hold local currency debt worth some 400 billion Iceland crowns, or 25 percent of GDP.
These funds are frozen in Iceland since the country's financial meltdown last year, when Reykjavik suspended capital flows to protect the Icelandic crown from further losses.
(Writing by Simon Johnson and Wojciech Moskwa; Editing by Ruth Pitchford/Victoria Main)