Iceland has announced a state of emergency as fears grow of an "imminent" volcanic eruption that threatens to wipe out an entire neighborhood.

Residents were evacuated from their homes in the town of Grindavik, on the south western Reykjanes peninsula over the weekend. Meteorologists say the risk of an eruption is now "highly likely." 

Around 900 earthquakes have been recorded in southern Iceland in recent days, suggesting a major seismic event may be on the way. It has raised the prospect of Iceland once again being thrown into the chaos last seen in April 2010.

At that time, a series of volcanic explosions around the southern Eyjafjallajökull mountains caused a massive ash cloud. The subsequent closure of most Western European airspace for five days cost airlines close to $3 billion in canceled flights.

Called "The Land of Fire and Ice," Iceland remains one of the most geologically volatile places on Earth, sitting on the mid-Atlantic ridge where the North American and Eurasian tectonic plates meet. Fatalities from volcanic activity remain rare.

Fifty kilometers southwest of the capital Reykjavik, and just 30 kilometers from the country's international airport at Keflavik, the small fishing community of Grindavik is home to around 3,000 people. Geophysicists believe a sheet of molten magma measuring over 15 kilometers has built up beneath the coastal town in recent months and now threatens to rupture the earth's surface. 

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Matthew Roberts, Director of Research at the Icelandic Meteorological Office, says the threat is especially worrying as "the seismic activity is close to a populated area, it's close to infrastructure such as a geothermal power plant and a major spa lagoon."

He continued: "We believe that this intrusion is literally hovering, sitting in equilibrium now just below the Earth's surface at a depth of less than definitely one kilometer. The major worry from a hazard and risk perspective is that the magma could come to the surface and produce a fissure eruption, a Hawaiian-style lava producing volcanic eruption."

Residents of Grindavik were evacuated on Saturday, although on Sunday a representative of each household was allowed to return home to collect pets and other valuables. Livestock has also been removed from the area, with large cracks appearing in roads around the town and damage to some structures.

Iceland's authorities say a change to air regulations has minimized the risk of interruptions to flights should an eruption begin. But the main airport at Keflavik would likely close for some time.

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