In the book "Icelandic Folk and Fairy Tales" (Iceland Review Library, 1987), folklorists May and Hallberg Hallmundsson explain how the Icelandic conception of nature is intimately tied to its folklore of elves and fairies.
"Icelanders are generally very attached to their country, perhaps more so than most other peoples ... It is a love for the land itself in its physical presence, for its soil, mountains, streams, valleys, and even its fire-spewing volcanoes and frozen wastes of ice," the authors write. "To the Icelanders, the land was never just an accumulation of inanimate matter - a pile of stones here, a patch of earth there - but a living entity by itself. Each feature of the landscape had a character all its own, revered or feared as the case may be, and such an attitude was not a far cry from believing that it was actually alive."
That life spirit said to inhabit the hills and streams of this island nation has come to be personified as elves and other magical beings. While it's easy to mock such folk beliefs as backward or antiquated, most cultures profess a belief in supernatural or magical beings, including demons, angels, ghosts and genies (djinn). These elves, like the fairies of early British lore, have many human qualities and may exact revenge if mistreated or disturbed. Elves and fairies are believed to live in their own separate, hidden world and generally ignore humans, but must be treated with respect; to do otherwise invites anything from mischievous pranks to child abduction by elves.