The pilots aboard the Boeing 767 declared an in-flight emergency about two hours after taking off from Gatwick Airport.
It landed safely at Keflavik airport, and the airline said "all guests and crew will be taken care of until we arrange new flights."
The airline didn't disclose the nature of the mechanical issue, but said the plane would remain in Iceland for maintenance, and passengers would be put up in hotels.
It declined to say how many people were onboard, citing competition reasons.