A volcanic eruption that has engulfed homes in an Icelandic fishing port confirms that a long-dormant faultline running under the country has woken up, threatening to belch out lava with little warning for years to come, an expert warned on Tuesday.

Glowing lava swallowed several homes on Sunday at the edge of the town of Grindavik, southwest of the capital Reykjavik.

The fishing town was mostly evacuated due to threat of an eruption last month and the most recent volcanic activity has since eased, authorities in the North Atlantic nation said on Monday.

The island straddles the Mid-Atlantic Ridge, a crack in the ocean floor separating the Eurasian and North American tectonic plates.

Sunday's eruption was the fifth in fewer than three years on the Reykjanes peninsula, which had not previously seen one in centuries.

"After eight centuries of a relative break and a complete cessation of surface activity, we have entered a new episode of plate separation which could last several years – possibly decades," volcanologist Patrick Allard from France's Institut de Physique du Globe de Paris told AFP.