In recent years Iceland enjoyed a standard of living that was among the highest in the world. Its prosperity initially rested on the fishing industry, but with the gradual contraction of this sector the Icelandic economy developed into new areas.
By the beginning of the 21st century, Iceland had come to epitomise the global credit boom. Its banks expanded dramatically overseas and foreign money poured into the country, fuelling exceptional growth.
Before the global credit crunch took hold, Icelandic banks had foreign assets worth about 10 times the country's GDP, with debts to match, and Icelandic businesses also made major investments abroad.
The global financial crisis of 2008 exposed the Icelandic economy's dependence on the banking sector, leaving it particularly vulnerable to collapse.
In October 2008, the government took over control of all three of the country's major banks in an effort to stabilise the financial system. Shortly after this, Iceland became the first western country to apply to the International Monetary Fund (IMF) for emergency financial aid since 1976.
The economy shrank by 6.8% in 2009, though by the end of 2010 there were some signs of an improvement, with the first growth recorded for two years.
In the long term, Iceland's well educated workforce and its extensive and as yet largely untapped natural resources are likely to provide the key to its recovery from the economic crisis, though concerns have been raised over the potential environmental impact of developing the latter.
Environmentalists have protested that a major aluminium smelter project and associated geothermal and hydroelectric schemes were being pushed through at the expense of fragile wildlife habitats.
The country has extended its territorial waters several times since the end of the 1950s to protect its fishermen and their main catch of Atlantic cod from foreign fleets.
Traditionally a whaling nation, Iceland abandoned the practice in 1989 in line with an international moratorium. It later resumed scientific whaling, intended to investigate the impact of whales on fish stocks, and in 2006 it announced a return to commercial hunts. The move was condemned by environmental groups.
Although it has no armed forces, Iceland is a member of Nato, and US troops were stationed in the country from World War II until 2006. In 1985 Iceland declared itself a nuclear-free zone.
Relations with Europe
Icelanders have for a long time been resistant to the idea of joining the European Union, though the country is a member of the Schengen border-free travel zone and the European Free Trade Association (EFTA).
Attitudes towards the EU slowly softened, and in July 2009 the country formally applied for EU accession.
The government hopes that the path to EU membership will be completed by 2012, but there are a number of obstacles that could disrupt this timetable.
Chief among them is a debt dispute with Britain and the Netherlands arising from the 2008 collapse of the Icelandic banking sector, which hit British and Dutch investors hard. However, efforts to resolve this appeared to be making some headway by the end of 2010.
The debt issue has in its turn led many Icelanders to question whether EU membership is such a good idea after all, and an opinion poll conducted shortly before formal accession talks began in July 2010 showed that a majority was in favour of withdrawing the country's application.
Other areas that have the capacity to derail the negotiations are Iceland's whale hunting industry and its insistence on maintaining its fishing limits - an issue that precipitated the "Cod Wars" of the 1950s and 1970s.
Iceland's announcement that it was unilaterally increasing its mackeral fishing quota for 2011 by nearly 17,000 tonnes looked set to increase tensions with the EU and Norway.
President: Olafur Ragnar Grimsson
Prime minister: Johanna Sigurdardottir
Social Democrat Johanna Sigurdardottir took over as head of a centre-left coalition in January 2009, after protests about Iceland's economic collapse brought down the government of Geir Haarde.
Many blamed the crisis on Mr Haarde's centre-right Independence Party, which has dominated Icelandic politics since full independence from Denmark in 1944.
Coming to power at the head of a coalition of her Social Democratic Alliance and the Green-Left Party, the new PM said her immediate priority would be to restore the public finances and deal with the country's economic crisis.
Her new government was confirmed in office with a resounding victory in parliamentary elections in April 2009, winning 34 out of 63 seats. It was the first time that centre-left parties had won a majority of seats since independence.
In June, the centre-left dominated parliament voted to apply formally for membership in the European Union, seen by many in Iceland as offering a way out of its economic woes.
Ms Sigurdardottir is Iceland's first female prime minister, and the world's first openly gay head of government.
Born in Reykjavik in 1942, Ms Sigurdardottir studied commerce, going on to work as a flight attendant, trade union organiser and office worker. She was elected to parliament for the Social Democratic Party in 1978.
She was social affairs minister from 1987 until 1994, when she unsuccessfully stood for her party's leadership. She then formed her own party, the National Movement.
Five years later, Ms Sigurdardottir's party merged with the Social Democrats and two other centre-left groups to form the Alliance, in an effort to counter to the right-wing Independence Party.
In 2007, the Alliance came to power in coalition with Mr Haarde's Independence Party, with Ms Sigurdardottir again serving as social affairs minister.
National radio and TV is provided by the Icelandic National Broadcasting Service (RUV), a public-service broadcaster owned by the state.
The RUV is obliged to promote the Icelandic language and the nation's history and cultural heritage. Its services are funded by a licence fee, and by advertising revenues.
Press titles include privately-owned and party-affiliated newspapers.
The constitution guarantees press freedom. Iceland came joint first in the Reporters Without Borders 2010 world press freedom index.
In 2010, Iceland passed legislation which it said would give greater protection to journalists and their sources than any other such law in the world. The WikiLeaks website helped to draft the law.
By mid-2010, 301,600 Icelanders were online - a 97% penetration rate (Internetworldstats).