Not folk music, but Icelandic: don't forget the beautiful music of the band Sigur Ros. Ageratis Byrjun is particularly lovely.

And a search for "iceland" on CDNow.com gave this:

POPULAR ARTIST ALBUM Cut Iceland Drop Iceland Richard Pinhas / Heldon Iceland Potatomen Iceland Jimmy Dawkins / Chicago Beau / Blue Ice Bragason Blues From Iceland Drum Club Live In Iceland Alec Empire Low On Ice (The Iceland Sessions) Fiddle Fever Icelandic Hymn Icelandic Folksongs / Various Icelandic Folksongs / Various Islandica Songs & Dances From Iceland Eyvind Kang Story Of Iceland The Story Of Iceland Various Artists (Tr) Traditional Folk Of Iceland

CLASSICAL ARTIST ALBUM 4 Icelandic Orchestral Works / Various 4 Icelandic Orchestral Works / Various Grieg/Svendsen Norwegian Dances/2 Icelandic M Hallgrimskirkja Motet Choir Icelandic Church Music Icelandic Choral Music / Various Icelandic Choral Music / Various Icelandic Church Music: Gifts Of The Spirit / Var Icelandic Church Music: Gifts Of The Spirit / Var Icelandic Songs 1 & 2 / Various Icelandic Songs 1 & 2 / Various Eyvind Kang The Story Of Iceland: Circle Of Fair Karma 1 Leifs / Gunnarsson / Caput Chamber Ensemble Icelandic Dances J. Leifs Fine 1/2/Icelandic Cantata/& Music Flute Iceland / Various Music Flute Iceland / Various Kjartan Olafsson Contemporary Music From Iceland Piano Music Iceland / Various Piano Music Iceland / Various Sequentia Edda-An Icelandic Saga/Myths F Soundscapes - Relaxing Music Icelands Stefansson / Langholt Choir Anthology Of Icelandic Choir Music VA-Classical Icelandic Songs 03 & 04 VA-World Icelandic Songs 1& 2