The plume was seen rising from a crater under about 200 metres of ice at the Eyjafjallajokull glacier, close to the site of another eruption which started last month and only died down on Monday.
The Icelandic Civil Defence Authority ordered 700 people to evacuate their homes and warned that melting ice could set off floods at a nearby river, which had already risen by 84 centimetres.
A coast guard plane flying overhead was able to spot an opening in the glacier, but no lava or fire was immediately visible due to low clouds.
Icelandic scientists had measured increased seismic activity near the glacier about two hours before the volcano started to erupt in the early morning on Wednesday.
In March, another volcano erupted near the Eyjafjallajokull glacier and caused no casualties.
Published 14 April 2010, 15:48 IST