How and when was Iceland created?  The simplest answer is due to the continental drifts after what is now North America broke away from what is now Norway (and Europe).  To get the exact timing we would have to get rock samples from the bottom of the North Atlantic Ocean both between Iceland and Norway and Iceland and Greenland.

Continental drift has been going on for probably as long as the Earth has had solid crust.  Some 60-65 million years ago the splitting between what is now known as North America and Europe started.  Each is part of its tectonic plate, called the North America tectonic plate and the Eurasia tectonic plate.  The reason for this timing might be that around that time a mantle plume had pushed underneath Greenland and volcanic activities started in the area to both sides of the mantle plume.

At the start what is Greenland today and Norway were part of the same continent, but then the movement of the plates resulted in the North America plate moving north and west while the Eurasia plate move south and east.  What had started as a hot spot under what is now Greenland had resulted in the splitting up of the continent into two plates.  In the area between, for thousands and millions of year magma came from the plume to the surface and created and maintained a land bridge between the two parts.  As the gap stretched the land bridge stopped connecting the continents and finally it turned into an island.  That island later becomes what we call Iceland or Ísland in Icelandic.  This was about 25 million years ago.

Since then, a lot of things have happened.  The mantle plume that used to be under Greenland is now under Iceland because the Earth’s crust has been moving in whole to northwest.  (The other option is that the plume has moved, but that is less likely.)  It has been moving gradually southeast under the country.  Enlarging it from the centre moving other parts towards northwest or southeast depending on which side of the centre they are.  The land bridge was in the beginning both part of the North America plate and the Eurasia plate and the island still is.  The northwest part belongs to the North America plate, while the southeast part belongs to the Eurasia plate.  Through the centre goes the Mid-Atlantic Ridge that has the name Reykjaneshryggur (Reykjanes Ridge) southwest of Iceland, but Kolbeinseyjarhryggur (Kolbein Island Ridge) northeast of Iceland.  Iceland is the only place where one can see the Mid-Atlantis Ridge on dry land.