Countrywide Internet isolation, inevitable fork Many countries around the world have provisions for shutting off the Internet as well as isolating itself from the Internet (where networking within borders still flourishes), any transaction processing (mining) going on within that country will only find nodes within that country and start following its own chain.

Is this a correct assumption?

Secondly, if this is a correct assumption, how will the network deal with this once it comes back online?

I foresee alt-chains emerging due to this, and persisting with their own exchange rates, very similar to the different fiat currencies today.

So:


Are my assumptions correct?
What, if any, provisions does the bitcoin protocol have for forks of this size (which wouldn't necessarily be that large, but still have real consequences for people forced to use them)?
Your assumptions are perfectly right. Since there is no information exchange between the two partitions while the network is partitioned, and Bitcoin guarantees liveness, the global consistency suffers (see CAP Theorem). This means that each partition will have its own blockchain fork, unaware of each other. The forks are incompatible not just because the chain is defined to be a single path from a single header block to the genesis block, but also because transactions in the partitions will contradict each other (not least the mining generation transaction in the block).
Should the partition be prolonged the forks may even start to diverge in difficulty, as they will only see the computational power in their own network and adjust accordingly.

As for the merge, this is still being discussed and we do not have a good contingency plan. Letting the system merge the forks by itself, i.e., dropping the fork with the least work in it, would roll back the entire transaction history in that partition. A manual intervention by making the fork persistent (the alt-coin scenario you mentioned) is also not desirable, as it results in an immediate doubling of the funds in circulation, Furthermore it is likely that one of the forked alt-coins is going to whither and eventually be abandoned anyway. For now the best we can do is attempt to avoid prolonged chain forks, but the risks you pointed out are real and worth discussing before it's too late.