Iceland was populated from Europe hundreds of years ago so the people think of themselves as European but it lies in the middle of the Atlantic Ocean and is not physically part of any continent.
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Politically Iceland belongs to the continent of Europe. However geologically Iceland is a subaerial part of Mid-Atlantic spreading ridge, the ridge along which the oceanic crust spreads and forms new oceanic crust. In addition to this, this part of the MOR (mid ocean ridge) is located atop a mantle plume causing Iceland to be subaerial (above sea level). Tectonically Iceland belongs neither to European continent nor to North America since it is a raised part of the oceanic crust, not a continental land mass.
No, Iceland is not a continent, it is an island country. The word "Iceland" is actually Norse for "island."
It is most closely related to Europe. In terms of it's physical location, the European and north American plates actually split in iceland.