Iceland accepts all EU/EEC licenses, so no need for an IDP.
Driving there is a piece of cake - the road infrastructure is great!
Be aware of a few things:
- Check the weather forecast - things can change very quickly, especially in unsheltered areas (in areas with no mountains).
- Hold your car doors when you open them. If there's high wind, it can bend the doors and cause a lot of damage that you'll be liable for.
- Beware of American drivers who have never driven in Europe (Iceland, like the rest of Europe, follows the Vienna convention for driving rules).
- Do not speed - the enforcement is exactly like in Switzerland.
I was there in October and rented a 4x4. In hindsight that was unneeded. Where you go and the time of year you go will determine whether or not you need a 4x4.