We get this question many times and it depends on what part of Iceland you are going to drive and time of the year you are visiting. Also to consider is your driving experience.
If you are only going to drive the main road (ring road), circle tour around the island with a few detours around the coastline you do not need a 4x4 car. Most of the main roads in Iceland are paved and are perfectly fine to drive with a 2wd car. Some of the roads when taking detours off the main roads are going to be gravel and are also fine to drive with a 2wd car.
But we still would recommend to renters that are not used to driving any gravel roads to consider the option of having a 4x4 car for it is safer on the gravel roads. 4x4 cars can also handle Iceland weather conditions more easily for the gravel roads can have potholes and also if there has been raining they can be very muddy and more difficult to drive.
Travelling in a campervan in Iceland you will not need to have 4x4 for all campsites are easily accessible with a 2wd camper. 2wd campervans are the most popular campers for rent in Iceland and they can take you everywhere except for the mountain highland roads (F-roads).
We are also often asked if traveling the golden circle (Þingvellir, Geysir, Gullfoss) will require a 4x4 car and the answer to that is also no. It is perfectly fine to drive the golden circle route with 2wd car only.
If you are planning to drive to the mountain highland roads in Iceland marked as F-roads on maps you will need to have a 4x4 car for 2wd cars are not allowed to drive on the F-roads. F-roads are mountain roads and the condition of these roads requires renters to have a 4x4 car. The F-roads are all in the middle of the island and are usually only open from middle of June until beginning of October each year, depending on the weather conditions. The F-roads range from being relatively easy to drive and being very difficult both for the condition of the roads itself and some will have difficult unbridged rivers that have to be crossed.
If you are traveling to Iceland in the winter you do not need a 4x4 car. You can drive around the island in winter with a 2wd car only. Rental cars in Iceland will have spiked winter tires from middle of October until end of April each year. Cars are not allowed to have tire chains in Iceland. All the main roads will have winter service and are usually easy to drive, but renters should of course check the weather forecast before heading out on the road.
But we still would recommend to renters that are not used to driving on any icy roads to consider the option of having a 4x4 car for it is safer on the slippery icy roads and can handle the Icelandic weather conditions more easily.
Weather alerts and more info can easily be checked on websites such as road.is, safetravel.is, vedur.is and drive.is
We also want to remind all renters that all off road driving is illegal in Iceland. Violators are subject to substantial fines.