The North Atlantic island nation, home to 384,000 people, has enjoyed relative political stability since 2017 and ranks among the wealthiest countries in Europe per capita, bolstered by tourism, fisheries and cheap geothermal- and hydroelectric-powered aluminium production.
However, inflation and borrowing costs that are near their highest level since the 2008 financial crisis have helped spark an economic slowdown, propelling growing hardship to the forefront of voters' concerns.
A series of volcanic eruptions near the capital Reykjavik, causing displacement of thousands of people and costly infrastructure repairs, have also dampened tourism.
Thousands of people have been displaced by molten lava from an erupting volcano near the capital. (AP PHOTO)
A snowstorm in the northern and eastern part of the country could still delay the final result early on Sunday, according to public broadcaster RUV.
Opinion polls ahead of the election had indicated that the ruling coalition of the Left-Green Movement, the conservative Independence Party, and the centre-right Progressive Party, in power for the last seven years, was likely to be unseated.
However, the Independence Party led by Prime Minister Bjarni Benediktsson placed second after polls closed with just over 18 per cent of votes according to preliminary results, benefiting from a late surge in support.
Bjarni Benediktsson dissolved parliament in October and called a snap election. (AP PHOTO)
It was very closely followed by the centre-right Liberal Reform Party with just under 18 per cent, according to RUV.
The centre-left Social Democratic Alliance, which was last in government between 2009 and 2013, stood to come in first by taking over 20 per cent of votes.
Katrin Jakobsdottir of the Left-Green Movement resigned as prime minister in April to run for the presidency, a bid she lost. Her replacement, Bjarni Benediktsson, dissolved parliament in October and called an election following escalating coalition disagreements and public discontent over migration and energy and housing issues.
Iceland's population has surged by 20 per cent over the past decade, the most significant increase among OECD nations, fueloed by high immigration rates, further pressuring housing and healthcare.
While inflation and interest rates have recently started to decline, the cost of living crisis has reignited the question of EU membership in election debates. Polls suggest the pro-EU Social Democrats and the Liberal Reform Party combined would garner 40 per cent of votes.
"The biggest issue here right now is cost of living," Social Democratic leader Kristrun Frostadottir told Reuters in an interview on Wednesday.
The 36-year-old economist, who took over as party leader two years ago, is a champion of the Nordic welfare model and a favourite to become the new prime minister.
