The Icelandic Met Office has raised its aviation warning level near the Bardarbunga volcano to red after an eruption began overnight.
Scientists said a fissure eruption 1km (0.6 miles) long started in a lava field north of the Vatnajokull glacier.
Civil protection officials said Icelandic Air Traffic Control had closed the airspace above the eruption up to a height of 18,000ft (5,500m).
The volcano has been hit by several recent tremors.
The fissure eruption took place between Dyngjujokull Glacier and the Askja caldera, a statement from the Department of Civil Protection said.
The area is part of the Bardabunga system.
"Scientists who have been at work close to the eruption monitor the event at a safe distance," the statement added.
"The Icelandic Met Office has raised the aviation colour code over the eruption site to red."
It added that no volcanic ash had so far been detected but a coast guard aircraft was due to take off later to survey the site.
Until now the Met Office has kept its aviation warning level - indicating the potential threat of volcanic activity to air travel - at orange, its second-highest.
On Thursday, scientists said they were examining several "cauldrons" found near Bardarbunga volcano that could potentially be a sign of an eruption.
The cauldrons, depressions in the volcano's surface, each between 10-15m (49 ft) deep and 1km (0.6 miles) wide, were seen during a flight on Wednesday.
Bardarbunga is part of a large volcano system hidden beneath the 500m-thick (1,600ft) Vatnajokull ice cap in central Iceland.
Iceland's Eyjafjallajokull volcano erupted in 2010, producing ash that disrupted air travel across Europe.