A judge has ordered that work on a road highway be halted as it might have an impact on elves living nearby.
The project was stopped until the Supreme Court of Iceland rules on a case brought by a group known as Friends of Lava. The group are concerned about the harm caused by the road project on the environmental and the cultural impact - including the potential harm done to elves.
The Icelandic Road and Coastal Administration issued a statement saying that "issues have been settled by delaying the construction project at a certain point while the elves living there have supposedly moved on."
The protest group has grown in strength and regularly brings out hundreds of people to block the bulldozers from starting work on the road.
The landscape in the middle of the route has an elf church, and the campaigners believe the mythical creatures may live there.
For people living in Reykjavik, the "Huldufolk" - Icelandic for hidden folk, or elves, are very real.
A survey conducted by the University of Iceland in 2007 found that around 62% of the 1,000 respondents thought it was at least possible that elves exist.
Terry Gunnell, a folklore professor at the University of Iceland, said he was not surprised by the wide acceptance of the possibility of elves.
"This is a land where your house can be destroyed by something you can't see (earthquakes), where the wind can knock you off your feet, where the smell of sulphur from your taps tells you there is invisible fire not far below your feet, where the northern lights make the sky the biggest television screen in the world, and where hot springs and glaciers 'talk'," Gunnell said in an AP report.
Icelandic singer Bjork is a firm believer in elves. "We do," she told US comedian and TV host Stephen Colbert. "It's sort of a relationship with nature, like with the rocks. [The elves] all live in the rocks, so you have to. It's all about respect, you know."