Reykjavik  - Iceland's battered economy is showing some signs of improvement with inflation appearing to have peaked, the head of a delegation from the International Monetary Fund (IMF) said Friday.

"The crisis has led to a sharp drop in economic activity, but a late-year turnaround remains within reach," delegation head Mark Flanagan said, adding that "the krona has stabilized and inflation appears to have peaked."

Inflation has been estimated at some 20 per cent while interest rates are a crippling 18 per cent. The IMF assessment kindled some hopes that the central bank may lower interest rates.

The IMF delegation visited Iceland as part of a review after the fund in November approved a 2.1-billion-dollar loan to the North Atlantic nation of 320,000 people.

Iceland's main banks were taken over by the government in the wake of the global financial crisis and unemployment has surged.

Flanagan said that there was some possibility that currency restrictions would be reviewed.

Iceland is currently ruled by an interim government led by Prime Minister Johanna Sigurdardottir. The government recently changed the composition of the central bank, replacing David Oddsson - a former prime minister.

Early elections are due on April 25. The interim government replaced the grand coalition formed 2007 between the conservative Independence Party and the Social Democratic Alliance that collapsed after mass protests. (dpa)