Reykjavik’s foundation is equally romantic and beguiling as its location, set on the fringe of the Atlantic Ocean, surrounded by a lunar volcanic netherworld, with the shadowy hulk of Mount Esja in the background.

Legend has it that the world’s most northerly capital was founded by a Viking called Ingólfur Arnarson. According to Iceland’s ancient Sagas, he followed the Nordic tradition of letting the gods decide the location of his new home. As he sailed towards the land, he threw two wooden pillars overboard and sent his slaves off to find out where they came ashore.

After traversing the fertile south of Iceland, they expressed their disappointment on finding the pillars in the north: ‘For no good did we cross fine districts in order to settle on this remote cape’. Arnarson named the place Reykjavik (‘Smokey Bay’) after the steam rising from the hot springs.

Today, these numerous geothermal springs, running beneath the city, provide almost all the heating and water in the city. The only by-product of this system is a faint odour of hydrogen sulphide, especially evident when showering. But the low level of fuel emissions gives the city clean air and crystal clear skies - when it is not raining.

The lack of pollution is also due to the comparatively small size of the capital. The city consisted of only a handful of farmhouses until the middle of the 18th century when a small trading community began to grow. It was granted a municipal charter and gradually developed as an urban centre. By the end of WWII, Iceland gained full autonomy from Denmark and Reykjavik became Iceland’s capital city.

Although it still feels like a provincial town, with its low buildings and brightly painted houses, Greater Reykjavik (including the Old Town, harbour and six surrounding municipalities) is home to three out of five Icelanders and the diminutive city dominates Iceland politically, socially, economically and culturally.

Fast-growing Reykjavik is currently in the midst of its biggest building boom ever, expanding outwards but also regenerating and rebuilding the old city centre, with a range of both residential and business developments under way.

The project everyone is talking about, however, is one of the city’s most ambitious to date, the construction of the new Icelandic National Concert and Conference Centre, due to open in Autumn 2009. The complex, which cost US$100 million, will be located by the harbour and include a state-of-the-art 1,800-seat concert hall, a rehearsal and recital hall, a cluster of conference and meeting halls and a luxury hotel.

Since Reagan and Gorbachev played out the end game of the Cold War in Reykjavik in 1986, the city has emerged as an unlikely tourist destination. Countless travel articles are published focusing on its nefarious nightlife and thousands of tourists a year fly to the city to seek out the legendary bars and clubs.

Considering that beer prohibition only ended in 1989, this is particularly impressive but the locals seem to have made up for lost time and the scene in the city centre at weekends is one of hedonistic mayhem. The city’s nightlife is perhaps fuelled by the fact that most Icelanders let go of their weekday Nordic calm and instead reveal the fiery Celtic side of the their heritage (the Vikings kidnapped many Scots and Irish on their way over), especially evident in their friendliness and openness to foreign visitors.

During the day, Reykjavik is a far more sedate place with trim houses, rubbish-free streets and an easygoing pace of life. There are bountiful cultural attractions, countless cafés, six geothermal swimming baths and a myriad of day trip opportunities into the stunning hinterland.

One of the most charming things about Reykjavik is that everything visitors would want to see is handily located within walking distance. Cultural festivals are also currently multiplying and maturing, as Iceland begins to establish its cultural identity.

Situated in the country’s southwest corner, on Faxaflói Bay, the city has a very wet climate and with winds and rain blowing in from the sea. However, the Gulf Stream prevents the city from becoming as cold as its northerly location might suggest.

Still, winters are long and bleak, with just four hours of daylight on some days, although the chance to view the spectacular Aurora Borealis or Northern Lights makes up for this. Summer, by contrast, brings the famed midnight sun with the city’s inhabitants at their most colourful and the streets taking on a much lighter atmosphere at night.