The North Atlantic island nation, home to 384,000 people, has enjoyed relative political stability since 2017 and ranks among the wealthiest countries in Europe per capita, bolstered by tourism, fisheries, and cheap geothermal- and hydro-electric-powered aluminium production.
However, inflation and borrowing costs are near their highest level since the 2008 financial crisis and have helped spark an economic slowdown, propelling growing hardship to the forefront of voters' concerns.
A series of volcanic eruptions near the capital Reykjavik that displaced thousands and led to costly infrastructure repairs have compounded issues by dampening tourism.
Polls open at 0900 GMT on Saturday and close at 2200 GMT, with a final result expected on Sunday morning.
Iceland's cost-of-living crisis reignited debate over EU membership during the election campaign. (AP PHOTO)
A fierce snowstorm forecast to hit the eastern part of the country on Saturday could delay vote counting, prompting authorities to encourage voters to cast their ballots early.
Polls indicate the ruling coalition of the Left-Green Movement, the conservative Independence Party, and the centre-right Progressive Party, in power for the past seven years, is likely to be unseated.
"We've had the same coalition for seven years, and there seems to be a desire now for new people in government," University of Iceland political scientist Stefania Oskarsdottir said.
Katrin Jakobsdottir of the Left-Green Movement resigned as prime minister in April to run for the presidency, a bid she lost.
Her replacement, Bjarni Benediktsson of the Independence Party, dissolved parliament in October and called an election following escalating coalition disagreements and public discontent over migration and energy and housing issues.
Iceland's population has surged by 20 per cent in the past decade - the most significant increase among OECD nations - fuelled by high immigration rates and further pressuring housing and health care.
While inflation and interest rates have recently started to decline, the cost-of-living crisis has reignited the question of EU membership in election debates.
Polls suggest the pro-EU Social Democrats and the Liberal Reform Party combined would garner 40 per cent of votes.
The centre-left Social Democratic Alliance, last in government between 2009 and 2013, stands to gain more than 20 per cent of votes, followed by the centre-right Liberal Reform Party.
"The biggest issue here right now is cost of living," Social Democratic leader Kristrun Frostadottir told Reuters.
The 36-year-old economist, who took over as party leader two years ago, is a champion of the Nordic welfare model and a favourite to become the new prime minister.
