The first people known to have inhabited Iceland were Irish monks who settled there in the eight century, but left with the arrival of the Norsemen, who systematically settled Iceland in the period 870-930 AD. Iceland was thus the last European country to be settled.

The main source of information about the settlement period in Iceland is the Landnamabok (Book of Settlements), written in the 12th century, which gives a detailed account of the first settlers. According to this book Ingolfur Arnarson was the first settler. He was a chieftain from Norway, arriving in Iceland with his family and dependents in 874. He built his farm in Reykjavik, the site of the present capital. During the next 60 years or so Viking settlers from Scandinavia, bringing some Celtic people with them, spread their homesteads over the habitable areas.

In the year 930, at the end of the Settlement period, a constitutional law code was accepted and the Althingi established. The judicial power of the Althingi was distributed between 4 local courts and a Supreme Court of sorts was conducted annually at the national assembly at Thingvellir. 

In the year 1000 Christianity was peacefully adopted by the Icelanders at the Althingi, which met for two weeks every summer, attracting a large proportion of the population. The first bishopric was established at Skalholt in South Iceland in 1056, and a second at Holar in the north in 1106. Both became the country's main centers of learning. 

In the late tenth century Greenland was discovered and colonized by the Icelanders under the leadership of Erik the Red, and around the year 1000 the Icelanders were the first Europeans to set foot on the American continent, 500 years before Columbus, although their attempts to settle in the New World failed. 

In 1262-1264 internal feuds, amounting to a civil war, led to submission to the king of Norway and a new monarchical code in 1271. When Norway and Denmark formed the Kalmar Union in 1397, Iceland fell under the sovereignty of the King of Denmark. 

After the "Golden Age" of independent Iceland had ended, things went from bad to worse. The Danish kings brought about the Reformation of the Church in 1551, which resulted in Danish control over the Church, and confiscation of its great wealth. They replaced the Hansa and English trade with an oppressive Danish trade monopoly, and established absolute monarchy in 1662, thus transferring all governing power to Copenhagen. While this arrangement was very profitable for the Danish Crown, these changes were disastrous for the Icelandic economy. Further problems arose in the food supply due to cooling of the climate during the 16th and 17th centuries. 

The eighteenth century marked the most tragic age in Iceland's history. In 1703, when the first complete census was taken, the population was approximately 50,000, of whom about 20% were beggars and dependents. From 1707 to 1709 the population sank to about 35,000 because of a devastating smallpox epidemic. Twice again the population declined below 40,000, both during the years 1752-57 and 1783-85, owing to a series of famines and natural disasters. 

At the end of the 18th century the Althingi had been dissolved and the old diocese replaced by one bishop residing in Reykjavik. As a consequence of the plight of the populace the trade monopoly was modified in 1783 and all subjects of the Danish king given the right to trade in Iceland. In 1843 the Althingi was reestablished as a consultative assembly. In 1854 foreign trade was given entirely free. In 1874, when Iceland celebrated the millennium of the first settlement, it received a constitution from the Danish king and control of its own finances. 

In 1904 Iceland got home rule and finally in 1918 independence. Finally, on 17 June 1944, the Republic of Iceland was formally proclaimed at Thingvellir.