The agreement with the EU is independent of Iceland's NATO membership and existing defence pacts with the United States, public broadcaster RÚV said.
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European Commission President Ursula von der Leyen said on Thursday that the EU will launch talks on a security and defence partnership with Iceland.
"We will cooperate more closely on hybrid threat response, civil protection and secure communications," von der Leyen said in a post on X after a press conference in Keflavík with Iceland’s Prime Minister Kristrún Frostadóttir.
Frostadóttir said she was hopeful that talks would conclude by the end of the year.
"This is very important for us to show that we can have cooperation on critical infrastructure, civil protection, any sort of dual use defence investment and this also includes hybrid and cyber threats," she said.
This agreement with the EU is independent of Iceland's NATO membership and existing defence agreements with the United States, national public broadcaster RÚV said.
"With this agreement, Iceland has also entered the European security and defines cooperation," von der Leyen said.
"There are already eight allied countries, including Norway, the United Kingdom and Canada. With this agreement, you will gain access to our SAFE project, which invests around €150 billion per year in security and defence."
At the meeting, Frostadóttir also said a comprehensive review of Iceland's terms of trade with the European Union, announced in December 2023, would start soon.
Iceland's government said in December that it aims to put the question of EU membership to a referendum by 2027.
Frostadóttir's administration also said it would set up a panel of experts to look into the advantages and disadvantages of retaining the Icelandic crown over adopting the Euro.
According to a poll conducted last June by market research company Maskína, support for EU membership among Iceland's population is growing.
That poll found just over 54% of respondents were in favour of joining the bloc, with the majority saying they thought households would be financially better off as part of the EU.
That was a significant swing in favour of membership in a country that has generally been ambivalent about joining the EU.