The eruption began in the early afternoon following a series of earthquakes north of Grindavik, a coastal town of 3,800 people that was also evacuated.
The Met Office said lava was shooting about 50 meters (165 feet) into the sky from a fissure about 1 kilometer (1,100 yards) long.
The Blue Lagoon thermal spa was evacuated before the eruption began, national broadcaster RUV said.