The project has been halted until the Supreme Court of Iceland rules on a case brought by a group known as Friends of Lava, who cite both the environmental and the cultural impact — including the impact on elves — of the road project. The group has regularly brought hundreds of people out to block the bulldozers.
And it's not the first time issues about "Huldufolk," Icelandic for "hidden folk," have affected planning decisions. They occur so often that the road and coastal administration has come up with a stock media response for elf inquiries, which states in part that "issues have been settled by delaying the construction project at a certain point while the elves living there have supposedly moved on."
Scandinavian folklore is full of elves, trolls and other mythological characters. Most people in Norway, Denmark and Sweden haven't taken them seriously since the 19th century, but elves are no joke to many in Iceland, population 320,000.
A survey conducted by the University of Iceland in 2007 found that some 62 percent of the 1,000 respondents thought it was at least possible that elves exist.
Ragnhildur Jonsdottir, a self-proclaimed "seer," believes she can communicate with the creatures through telepathy.
"It will be a terrible loss and damaging both for the elf world and for us humans," said Jonsdottir of the road project.
Though many of the Friends of Lava are motivated primarily by environmental concerns, they see the elf issue as part of a wider concern for the history and culture of the very unique landscape.
Andri Snaer Magnason, a well-known environmentalist, said his major concern was that the road would cut the lava field in two, among other things, destroying nesting sites.
"Some feel that the elf thing is a bit annoying," said Magnason, adding that personally he was not sure they existed. However, he added, "I got married in a church with a god just as invisible as the elves, so what might seem irrational is actually quite common" with Icelanders.
Terry Gunnell, a folklore professor at the University of Iceland, said he was not surprised by the wide acceptance of the possibility of elves.
"This is a land where your house can be destroyed by something you can't see (earthquakes), where the wind can knock you off your feet, where the smell of sulfur from your taps tells you there is invisible fire not far below your feet, where the northern lights make the sky the biggest television screen in the world, and where hot springs and glaciers 'talk,'" Gunnell said.
"In short, everyone is aware that the land is alive, and one can say that the stories of hidden people and the need to work carefully with them reflects an understanding that the land demands respect."
Gunnell said similar beliefs are found in western Ireland, but they thrive in Iceland because people remain in close contact with the land. Parents still let their children play out in the wilderness — often late into the night. Vast pristine areas remain, even near the capital, Reykjavik.
And at Christmas, Icelanders await not just one Santa Claus, but 13 trolls known as the "Yule Lads" who come to town during the 13 days before Christmas, each with his own task, putting rewards or punishments into the shoes of little children. They include Stufur, or Stubby, who is extremely short and eats crusts left in pans; Pottaskefill, or Pot-Scraper, who snatches leftovers; and Hurdaskellir or Door-Slammer, who likes to slam doors at night.
"If you ask an Icelander about elves, they might say they don't believe," said Jonsdottir. "But we always have stories of them, if not from ourselves then from someone close like a family member. Of course, not everyone believes in the stories, but the stories and the elves are still there and being told."