Scientists said a fissure eruption 0.6 miles long started in a lava field north of the Vatnajokull glacier.
Civil protection officials said Icelandic Air Traffic Control had closed the airspace above the eruption up to a height of 5,000ft.
The volcano has been hit by several recent tremors.
The fissure eruption took place between Dyngjujokull Glacier and the Askja caldera, a statement from the Department of Civil Protection said.
The area is part of the Bardabunga system.
“Scientists who have been at work close to the eruption monitor the event at a safe distance,” the statement added.
“The Icelandic Met Office has raised the aviation colour code over the eruption site to red.”
It added that no volcanic ash had so far been detected but a coast guard aircraft was due to take off later to survey the site.
Until now the Icelandic Met Office has kept its aviation warning level – indicating the potential threat of volcanic activity to air travel – at orange, its second-highest.
On August, scientists said they were examining several “cauldrons” found near Bardarbunga volcano that could potentially be a sign of an eruption.
The cauldrons, depressions in the volcano’s surface, each between 49 ft deep and 0.6 miles wide, were seen during a flight on August 27.
Bardarbunga is part of a large volcano system hidden beneath the 1,600ft-thick Vatnajokull ice cap in central Iceland.
Iceland’s Eyjafjallajokull volcano erupted in 2010, producing ash that disrupted air travel across Europe.
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