Its capital is Reykjavik (7)
I believe the answer is:
'its capital is reykjavik' is the definition.
(I've seen this before)
This is the entire clue.
(Other definitions for iceland that I've seen before include "North Atlantic island republic" , "The capital city is Reykjavik" , "Althing its parliament" , "Volcanic country" , "Northern country" .)