Iceland: The island at the heart of the world

M y hands were freezing as we lumbered across the lava fields, swaddled in several layers of clothing, clad in thick neoprene suits and with steel tanks on our backs. After a mercifully short walk, we came to the edge of a crack in the tundra and, snapping on masks and fins, lowered ourselves into the icy water.

I kicked off, my exposed lips turning numb in waters that had flowed down from glaciers 50km away and been filtered over decades as they trickled through porous rocks. The visibility was astonishing – I could see a huge brown trout at least 60m ahead of me. And as I swam along the fissure, into crevices and along tunnels, I could touch America on one side and Europe on the other.

This was the Silfra crack in Iceland – part of the geological dividing line between the continents – which is slowly widening as the tectonic plates shift a couple of centimetres each year. Most of the rift sits in the deep waters of the Atlantic, but as it cuts across Iceland it forms huge gullies filled with the purest waters imaginable.

Staring around in wonderment, I drifted along the canyon between the continental plates. Below me was a jumble of giant boulders, scattered by successive earthquakes. My hands began to ache in the cold, but I was too exhilarated to care as I swam through an arch formed by fallen rocks, into a cavernous area called the cathedral, with what seemed like celestial light shining through the blue water, then up into a shallower lagoon.

Minutes later, I had waddled back to the van, stripped off my dry-suit and was clutching a steaming cup of coffee. The feeling slowly returned to frozen fingers as I chatted with the Belgian divemaster. He said he had done the dive dozens of times and never failed to be amazed; little wonder, given that it is ranked among the five finest in the world. He also told me that his girlfriend had been in the water during an earthquake a few weeks earlier – an occupational hazard in a land that has hundreds of quakes a year.

Diving was the last thing on my mind when we arrived in Iceland, with fierce winds kicking rain into our faces as we descended from the aircraft. Thick grey clouds clung to the landscape as we drove into Reykjavik, obliterating what would turn out to be astonishing primeval views of glaciers, volcanoes and black ash fields, broken only by belches of smoke bursting from the ground.

Within minutes of arriving at our house, an elderly man delivering freshly laundered bedding had joined us for a drink and was telling of the island's history and the shame felt over recent financial foolishness. Soon he had called his daughter-in-law to join us, and she was inviting us to a concert by her husband the following night.

It was a foretaste both of Iceland's immense hospitality towards strangers and of the dominant subject of conversation one year after the Icelandic bubble burst. "What a delight it would be to talk of art or literature or film just for a change," sighed an academic at one point. "Anything but the economy." It seemed churlish to mention that the country might have run out of cash, but the consequent freefall of the krona meant visitors could at least afford a beer in town.

Reykjavik's fabled nightlife was in full swing on our first night with the annual Airwaves music festival. As we waited for food in Prikid restaurant, there was a burst of electric guitar outside the window and everyone rushed downstairs. A lorry had pulled up in the street holding a band playing power chords. One singer wore pink spandex, a second slapped his bare belly while drinking Jack Daniels from the bottle, and a third breathed fire. After two songs, they handed out yellow washing-up gloves, the band's symbol. "That's the owner's group," said the waiter, as we went back upstairs to our food.

Several bands and many hours later, we were eating again, this time at Baejarins Beztu Pylsur, a celebrated hot dog stand beside the waterfront car park.

As we ordered eina meo ollu ("the works", with ketchup, sweet mustard, fried onion, raw onion and a mayonnaise relish), we noticed a photograph of a sheepish-looking Bill Clinton eating at the stall. It turned out he had stopped there with his bodyguards five years ago after a visit to the art museum. Three days later, he suffered a minor heart attack.

When the rain cleared, Reykjavik looked fabulous in the autumnal sun, with snow-dusted mountains to one side, the sea that sustained the island for so long to another and a glacier on the horizon. Two-thirds of the nation's population live in the city, but it retains an intimate, small-town feel. A little white house turned out to be the national parliament, scene of weekly protests against the previous government. At night, Yoko Ono's "Peace Tower" sent a shard of light 4,000m into the sky, cutting through the swirling spectacle of the Northern Lights.

We spent a contented few days drifting around the handful of designer shops, the galleries, the museums and the bars. Quirky coffee houses that shame the likes of Starbucks all seemed full of beautiful people tapping away on their Apple Macs as they remodelled their futures. A musician friend said the crash had revived a spirit of communalism as he showed me round the seafront studio that he was renovating to share with other musicians and artists.

One morning was spent at a flea market, another being shown a solitary grey gunboat that had defeated the might of the British navy in the Cod Wars, another riding horses through lava fields on the edge of town. An afternoon was spent luxuriating in the hot springs of the Blue Lagoon, laughing as we slapped handfuls of silica mud masks on our faces and ducked into geothermal steam baths, saunas and cold showers.

Away from the hot dog stand, the food was exceptional. In restaurants that felt like people's homes we picked our way through menus, avoiding the endangered species such as whale and porbeagle shark that were on offer to be rewarded with some of the best seafood I have tasted – cod, crab, halibut, lobster – together with local delicacies such as smoked puffin and roasted guillemot. We gave the ram's testicles and roasted sheep heads a miss, however.

As we wandered up to the road to Hallgrimskirkja, the concrete church that took 38 years to build and which towers over the city, an old wooden house burst into flames. It seemed in keeping with the endearing strangeness of the country, where the weird geology and rawness of nature makes fairy tales feel believable.

Most Icelanders are said to believe in trolls; one neighbour told us a convoluted tale of the "hidden people" who disrupted the building of their homes and had to be placated by a white witch.

We drove out of town, past some isolated farmsteads with barns half-buried in turf. At Thingvellir, home of the nation's parliament for almost a millennium, we shook hands over the tectonic plates dividing continents and tickled a placid pair of 10-pound trout hiding under a grassy overhang. At Gullfoss, a raging torrent of water seemed to fall into the belly of the earth. After hearty bowls of lamb soup and chunks of bread, we went on to the gushing pools of Geysir, where every five minutes one of them – named Strokkur – sends a plume of boiling water nearly 20 metres into the air.

That night we stayed at the Hotel Ranga in suites themed to represent the continents: my wife and I chose South America, with wall-hangings and wood panelling imported from Peru, while my son plumped for North America, with a bison's head and half a kayak sticking out from the wall. It felt like the right choice, given the seemingly endless vista that reminded us of the prairies. The smoked puffin, lamb and lobster were, once again, excellent.

The next day was magical. We headed up towards Myrdalsjokull glacier, where we zipped across vast highways of ice on snowmobiles at speeds of up to 60km/h.

At the top Andrina, our guide, built a complex map of the glacier in the snow as she explained how Katla, one of Iceland's most dangerous volcanoes, lay beneath us and was expected to blow again any time soon. Afterwards, we called in at a hamlet several kilometres off the main road, where a farming family had set up a tiny museum.

Olaf and Bergþora Sigurjonsson appeared and proudly let us into the room that housed their treasures: clothes, old British-made machinery and intricate woodwork carvings. Did they get many visitors, I asked? They paused, then said that a couple of Dutch cyclists had been passing and dropped in a few months earlier.

We drove on past giant waterfalls and volcanic ridges to Dyrholaey, a stunning peninsula with a giant black arch of lava. As the wind blew in our faces and the skies began to darken, we walked along vertiginous cliffs, which would have been crammed with thousands of puffins, gannets and guillemots just a few weeks earlier, past a beautiful lighthouse made redundant by satellite technology.

To the north we could see Myrdalsjokull, to the east – black laval columns rising out of the sea, while to the west the black beach stretched away into infinity. A perfect snapshot of a strange and alluring land.

Travel essentials: Iceland

Getting there

The writer travelled with Scantours (020-7554 3530; scantours.co.uk), which offers a wide range of tours in Iceland from £599 per person.

Reykjavik is served by Icelandair (08448 111190; icelandair.co.uk) from Heathrow, Glasgow and Manchester.

Iceland Express (0118 321 8384; icelandexpress.com) flies from Gatwick and Stansted; and from next summer, Birmingham.

Staying there

Hotel Ranga, Hella (00 354 487 5700; hotelranga.is). B&B starts at €187.

Visiting there

Diving was arranged by Arctic Adventures (00 354 562 7000; adventures.is). Prices start at ISK29,990 (£146) per person for a daytrip with two dives.

Snowmobiling was arranged by Arcanum Adventure Tours (00 354 487 1500; snow.is). Prices start at €115 per person for a one-hour glacier tour.

More information

Icelandic Tourist Board: 00 354 535 5500; icetourist.is