The eruption began on Thursday, spewing orange lava 80 metres (260 feet) high from a 3 km (2 mile) crack in the earth, but by Friday morning there were only a few sputtering vents.
It was the third eruption in the area, just south of the capital Reykjavik, since December.
Schools, kindergartens, museums and other public institutions in the region were closed on Friday as the lava had hit hot water pipes used to supply geothermally-heated water.
"It is a very bad situation to have this area without hot water, but there is electricity, there is potable water and we are hoping to have hot water by noon (on Friday)," Prime Minister Katrin Jakobsdottir told public broadcaster RUV.
The temperature in the area stood at -8 degrees Celsius (17.6 Fahrenheit) early on Friday.
Satellite images published by the Icelandic Met Office showed lava flows had reached roughly 4.5 kilometres (3 miles) to the west of the eruption, just some 500 metres (1600 feet) from the Blue Lagoon - a luxury geothermal spa - which was evacuated on Thursday and remained closed.
