The eruption began on Thursday, spewing orange lava 80 metres (260 feet) high from a 3 km (2 mile) crack in the earth, but by mid-day Friday there was mostly smoke and steam emerging from a few sputtering vents.
"Although the eruption has decreased significantly, it is still too early to say that it is ending," the Icelandic Meterological Office (IMO) said in a statement.
About 15 million cubic meters of molten rock had flowed from the ground in the first seven hours of the eruption, according to an IMO estimate on Friday.
It was the third eruption in the area, just south of the capital Reykjavik, since December.
The Blue Lagoon luxury geothermal spa, a tourist attraction, was closed to the public after lava covered its main access road, although the giant outdoor pool itself was unscathed, a Reuters eyewitness said after briefly being allowed to visit.
Schools, kindergartens, museums and other public institutions in the region were closed on Friday as the lava had hit hot water pipes used to supply geothermally-heated water.
"It is a very bad situation to have this area without hot water, but there is electricity, there is potable water," Prime Minister Katrin Jakobsdottir told public broadcaster RUV.
The temperature in the area stood at -8 degrees Celsius (17.6 Fahrenheit) early on Friday.
Some 20 people had worked overnight to restore hot water via an emergency pipeline that was already under construction, utility HS Orka said in a post on Facebook.
FISSURE ERUPTIONS
Authorities had previously hoped to restore supply during the day but this had now been delayed until midnight (GMT), the Civil Protection Authority said in a statement.
It could take up to two days to reach full pressure on the pipes, it said.
Unlike last month, when the town of Grindavik was hit, burning several houses to the ground, the latest outbreak did not damage any homes.
Kopavogsbaer, a municipality on the outskirts of the capital Reykjavik, invited people from the impacted area to use their public swimming pools for free.
Satellite images published by the Icelandic Met Office showed lava flows had reached roughly 4.5 km (3 miles) to the west of the eruption, just some 500 metres (1,600 feet) from the Blue Lagoon spa which was evacuated on Thursday.
Volcanic outbreaks in the Reykjanes peninsula are so-called fissure eruptions, which do not usually cause large explosions or significant dispersal of ash into the stratosphere.
However, scientists fear they could continue for decades, and Icelandic authorities have started building dykes to divert burning lava flows away from homes and critical infrastructure.
(Reporting by Frank Nieuwenhuis in Iceland and Stine Jacobsen in Copenhagen, editing by Terje Solsvik and Andrew Cawthorne)
By Frank Nieuwenhuis and Stine Jacobsen
