It's the second volcanic eruption on the Reykjanes peninsula in less than a month.
The eruption, which began in the early hours, posed an immediate threat to a small nearby fishing town.
But authorities said that the area north of Grindavik had been evacuated the previous day over fears that an outbreak was imminent amid an uptick in seismic activity.
Early-morning video footage from the site showed fountains of molten rock and bright orange lava spewing from fissures in the ground.
Authorities have been building barriers of earth and rock in recent weeks to try to prevent lava from reaching Grindavik, some 25 miles southwest of the capital Reykjavik.
But the latest eruption appeared to have penetrated the town's defenses.
The eruption marks the fifth in Reykjanes since 2021.
