A volcano that spewed glowing red lava near Iceland's capital Reykjavik after awakening for the first time in 900 years appears to be subsiding, experts have said.

Officials said the eruption was small and did not represent a danger to people.

Dramatic images filmed by a coast guard helicopter showed streams of red lava bubbling and flowing out of a fissure in a valley in Geldingadalur, close to Mount Fagradalsfjall on the Reykjanes peninsula in southwestern Iceland.

As the lava continued to flow under rain showers, blue gas and a vapour cloud rose from the site, just 40 kilometres from the capital and near a popular tourist destination, the Blue Lagoon geothermal spa.

The eruption occurred yesterday around 8.45pm, lighting up the night sky with a crimson glow as hundreds of small earthquakes shook the area.

While Iceland's Keflavik International Airport and the small fishing port of Grindavik are just a few kilometres away, the zone is uninhabited and the eruption did not present any danger to the public.

"The eruption is considered small at this stage and the volcanic activity has somewhat decreased since yesterday evening," the Icelandic Meteorological Office (IMO), which monitors seismic activity, said in a statement.

It said the "eruptive fissure" measured approximately 500 to 700 metres.

The lava area, it added, was less than one square kilometre, covering an area 500 metres wide, with small lava fountains. The vapour cloud be seen from Grindavik, an AFP reporter said.

The eruption took place in the Krysuvik volcanic system - which does not have a central volcano - about five kilometres inland from the southern coast.

The public has been advised to stay away from the scene and access to the area has been blocked off.

Immediately after the eruption police ordered residents living east of the volcano to close their windows and stay indoors due to the risk of possible gas pollution carried by the wind. 

"Currently gas pollution is not expected to cause much discomfort for people except close up to the source of the eruption. The gas emissions will be monitored closely," the IMO said.

Gases - especially sulphur dioxide - can be elevated in the immediate vicinity of a volcanic eruption, and may pose a danger to health and even be fatal.

Eruptions in the region are known as effusive eruptions, where lava flows steadily out of the ground, as opposed to explosive ones which spew ash clouds high into the sky.

The Krysuvik system has been inactive for the past 900 years, according to the IMO, while the last eruption on the Reykjanes peninsula dates back almost 800 years and lasted about 30 years, from 1210 to 1240.

But the region has been under increased surveillance for several weeks after a 5.7-magnitude earthquake was registered on 24 February near Mount Keilir on the outskirts of Reykjavik.

Since then an unusual number of smaller tremors - more than 50,000 - had been registered, the highest number since digital recordings began in 1991.

The seismic activity gradually moved several kilometres southwest after the quake, concentrating around Mount Fagradalsfjall, where magma was detected just one kilometre under the Earth's surface in recent days.

Iceland has 32 volcanic systems currently considered active, the highest number in Europe. The country has had an eruption every five years on average.

The vast island near the Arctic Circle straddles the Mid-Atlantic Ridge, a crack on the ocean floor separating the Eurasian and North American tectonic plates.

The shifting of these plates is in part responsible for Iceland's intense volcanic activity.

The most recent eruption was at Holuhraun, beginning in August 2014 and ending in February 2015, in the Bardarbunga volcanic system in an uninhabited area in the centre of the island. 

That eruption did not cause any major disruptions outside the immediate vicinity.

However in 2010, an eruption at the Eyjafjallajokull volcano sent huge clouds of smoke and ash into the atmosphere, disrupting air traffic for more than a week and cancelling more than 100,000 flights worldwide which left some 10 million passengers stranded.