Shortly before 1am, a magnitude 4.8 quake, the strongest to hit the region since the recent wave of seismic activity began last month, hit the country’s most populous region.
Guests woken up by the quake rushed to leave the hotels at the Blue Lagoon spa.
At one hotel, where lava rocks had fallen on the road and the car park was jammed with 20 to 30 taxis, driver Bjarni Stefansson described a scene of confusion.
“There was a panic situation,” Mr Stefansson said. “People thought a volcanic eruption was about to happen.”
The area around Mount Thorbjorn on the Reykjanes Peninsula has been shaken by hundreds of small earthquakes every day for more than two weeks due to a build-up of volcanic magma three miles underground.
Land in the region has risen by 9cm since 27 October but there are no signs of imminent eruption, according to the Icelandic Met Office.
It said the situation could change quickly, and a lava-producing eruption northwest of Thorbjorn was possible, it added.
Iceland, which sits above a volcanic hot spot in the North Atlantic, averages an eruption every four to five years. The most disruptive in recent times was the 2010 eruption of the Eyjafjallajokull volcano, which spewed so much ash into the atmosphere that airspaces over Europe were closed.
“We need to be prepared for the worst,” volcanologist Thorvaldur Thordarson said. “Magnitude 5 earthquakes, such as the one last night, are known to precede eruptions.”
The Blue Lagoon, where tourists bask in pools of seawater naturally heated deep underground, said it decided to close temporarily due to the night’s “disruption of the guests’ experience” and the prolonged stress on employees.