Iceland's president has said the country will hold a national election on October 28 after the governing coalition collapsed over a scandal about a proposed pardon for a sex offender.

Iceland's nine-month-old government has collapsed after a small coalition partner quit over an attempt by the prime minister's father to help clear a convicted paedophile's name.

Iceland has eased restrictions on investments abroad for households and has opened up for outward direct investments in another step towards removing its almost eight-year-old capital control regime.