By Balazs Koranyi

REYKJAVIK (Reuters) - Icelanders fed up with years of belt-tightening looked set on Saturday to oust the ruling Social Democrats, wooed with pledges of tax cuts and debt relief from the center-right, which presided over a spectacular financial collapse five years ago.

Leaden skies and driving sleet were a fair reflection of the mood of voters who have seen promises of a quick recovery fade, while mortgage debts rise, prices soar and crippling capital controls keep investment at a record low.

"I'm losing hope, to be honest," said Katrin Johannsdottir after casting her ballot in a school on the outskirts of the capital Reykjavik.

"It's been five years of tightening my belt, cutting back, and waiting," said the mother of two, whose inflation-indexed mortgage keeps rising, pushing her family deeper into debt.

Like many voters, she has little faith in the ability of politicians to make a difference. Whether because of disenchantment or the bad weather, the flow of voters to many polling stations appeared slow in the morning.

A recent Gallup poll indicated that only 15 percent trust the Althing, the world's oldest parliament, founded in 930. That made it Iceland's second least trusted entity after the banks.

With a population of just 320,000, the North Atlantic island became a European financial hub 10 years ago when its banks borrowed money cheaply and lured British and Dutch savers with high returns.

Growing unchecked under a relaxed regulatory regime, the banks' balance sheets expanded to 10 times Iceland's GDP by 2008, then crashed in a matter of days when credit markets froze in the wake of the Lehman Brothers bankruptcy.

Property prices followed, tumbling by more than 50 percent in some cases, while real wages fell by almost 30 percent and mortgages, often indexed to inflation, soared.

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The Independence Party took a last-minute lead in opinion polls from Sigmundur Gunnlaugsson's Progressive Party which, if confirmed in the election, would give Independence head Bjarni Benediktsson the right to form a government.

But with neither likely to win a majority, a coalition is likely between two parties that led Iceland, often jointly, for nearly 30 years before the crash. Party insiders consider a coalition a done deal.

The Social Democrats, despite making late gains, are expected to come in a distant third.

Polls were due to close at 06:00 p.m. EDT, with first results expected shortly afterwards.

"This election revolves around mortgage debt," said Egill Helgason, a political commentator for the Icelandic national broadcaster RUV. "The Progressives have promised the world, and then some."

Those promises focus on forcing foreign creditors of failed banks to take a write-down on their claims and give the cash to households.

"The last election was about the past and responsibility for the crisis. Now we're voting about the way ahead," said Benediktsson, a 43-year-old former professional soccer player.

"We've seen what cutbacks have done for our health care system and social benefits ... and people realize that we just can't cut down more to balance the budget."

Economic growth, a respectable 2.6 percent in 2011, slowed to 1.8 percent last year and some have forecast a further slowdown this year as lack of investment weighs on output.

(Editing by Kevin Liffey)