The order is expected to be in place for at least three weeks which will cause a lot of disruption, particularly as Grindavík plays home to the iconic Blue Lagoon tourist attraction.
Authorities will be able to return on behalf of residents in 'exceptional circumstances' to retrieve belongings.
Since the early hours of this morning, lava has been seen pouring from the volcano's top, making it the fifth eruption on the Reykjanes peninsula since 2021.
Iceland is home to 32 active volcanoes, and Grindavík only had its last evacuation order in Novemebr 2023.
Authorities say the eruption in December was its largest so far.