I don’t want to sound cheap, but an Icelandic hobo just bought me dinner. Reality hits hard as I stagger from a dark Reykjavik bar into blinding round-the-clock light at 4am and collide with the leather-clad chap who introduces himself as Gislin as he rolls down the street. Who could resist such a charitable drifter as he flings his arms round me, proffers congratulations on visiting Iceland and makes straight for the baguette stand?

The man’s generosity is typical of the 300,000 Icelanders who embrace a precarious existence on this magnificent island, once known for its high prices and now notorious for Eyjafjallajökull’s disruptive volcanic ash cloud. On the flip side of the financial crisis, excellent exchange rates mean prices are now comparable with London, and cheap accommodation in Reykjavik is booming.

I stay at budget digs, the Kex Hostel – a former biscuit factory on the edge of town. I only manage to grab one night here, such is its popularity, but I can’t resist returning with backpackers and Reykjavikers alike to drink Viking beer in its shabby-chic bar and lounge among recovered bric-a-brac and aged sofas.

Seeking an alternative, I check into the HI Reykjavik Downtown Hostel (hostel.is/Hostels/Reykjavikdowntown). I’m suffering a stinking hangover after my night on the tiles  so the friendly receptionist, Klara Arnalds, recommends “hotpot hopping” in the geothermal pools of Vesturbær baths, which offers free entry to those with ?a Reykjavik Welcome card, costing £10 for 24 hours.

I can’t resist the idea of soaking in seething hot spring pools of varying temperatures alongside the locals, and soon the morning after the night before is melting away under the warm hubbub of hotpot gossip.

The card also gives me free access to Reykjavik’s museums, so I spend an hour fascinated by the fiery illusions surrounding an excavated 10th-century longhouse at the underground Settlement Exhibition (minjasafnreykjavikur.is).

This tale of Vikings settling on such explosive terrain spurs me on to discover the region on a Golden Circle tour. I catch my breath amid crashing double cascades, tiptoe through temperamental geyser fields and feel humbled by mighty tectonic rifts. A truly unmissable experience, no matter what your budget.

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Reykjavik Excursions (re.is) offers one-day tours for £47, but carpooling at samferda.net/ or travelling by the Iceland On Your Own bus (re.is/IcelandOnYourOwn) is a cheaper way to explore this alien land. Awed but weary, another hotpot visit beckons, this time to the Blue Lagoon (bluelagoon.com), a bizarre spa supplied by a geothermal plant on the road between Reykjavik and Keflavik airport.

Admittedly, with entry at £26, it’s not exactly budget, but I can’t resist the chance to cake myself in silica mud and float on milky-blue waters, surrounded by blackened lava rocks, overwhelmed by just how weird this feels.

To get the most milky-blue bang for your buck, it is cheapest to combine spa entry with travel to or from ?the airport. Reykjavik Excursions run all-inclusive Blue ?Lagoon buses with onward transfer for £33pp.

Returning to Reykjavik, I decide on a more authentic commune with nature and board one of the boats frequently leaving the harbour for the Atlantic Ocean, hoping to spot something special in Iceland’s crisp waters.

Topping anything the Blue Lagoon has to offer, I am treated to majestic minke whales performing multiple dives as puffins flap frantically overhead. Elding (elding.is) runs three-hour voyages but before paying £42, check its ?website for the probability of sightings.

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After seeing these animals in their natural habitat, it’s difficult to wander the streets behind the harbour, where pricey Icelandic eateries serve up whale steak and roast puffin. But I assuage my conscience in the myriad foreign downtown restaurants, which serve up deliciously fresh budget dishes and still maintain an Icelandic edge. How ?can I resist an earthy barley risotto grown in volcanic ash?

Investing in a hearty meal proves crucial when I join the runtur (round tour) on Friday and Saturday night, as Reykjavik fills with rowdy Icelanders letting loose until the early hours.

A trip to Vin Bud (vinbudin.is), the government alcohol outlet, gets me some cheap pre-pub drinks and I soon find myself dancing like a maniac in indie joint Hressó (hresso.is). When free entry and live music are guaranteed until 5am, why not let loose yourself? Who knows, maybe you’ll be lucky enough to bump into Gislin while you’re there

Iceland Express (icelandexpress.com) offers one-way flights from London to Reykjavik from £89pp.

Where to eat, drink and sleep


Budget: Uno

Uno on Hafnarstræti in downtown Reykjavik has an extensive menu of deliciously fresh Italian dishes, including generous helpings of bruschetta from 890 ISK and half portions of pasta for those with smaller appetites – or pockets. I couldn’t resist the Byggotto risotto, made with Icelandic barley grown in volcanic ash.

See: uno.is

Mid-range: Fabrikkan

Close to Kex Hostel, Fabrikkan is an award-winning diner popular with stylish Icelanders enjoying square gourmet burgers in black leather booths. The speciality burgers, with names like Miss Reykjavik, The Trucker and The Big Bo, are all priced around 2000 ISK. Vegetarians can swap meat for Portobello mushrooms.

See: hamborgarafabrikkan.is

Luxury: Thrir Frakkar

Recommended by Icelanders and Jamie Oliver, homely seafood restaurant Thrir Frakkar is the place to splash out on traditional Icelandic dishes such as plokkfiskur fish stew or saltfiskur salted cod for around 4000 ISK. If your conscience and stomach can handle it, smoked puffin and whale steak are also available.

See: 3frakkar.com


Budget: Vin Bud

The government-owned off license, Vin Bud is the only shop permitted to sell alcohol. You must be at least 20 to purchase beers, wines and spirits here but prices can be a third of what you pay in a bar. A good way to start the runtur on a budget.

See: vingudin.is

Mid-range: Hressó 

The lighter it grows outside, the darker it gets in Hressó, a rowdy bar on Austurstræti with free entry, casual dress, live music and dance floor. Expect nothing less than an Icelandic band in a fit of musical passion, a drummer who beats his kit to death and a singer who croons from the rafters.

See: hresso.is/

Luxury: Nasa 

Since opening in 2001, Nasa has been Reykjavik’s biggest nightclub and the capital’s main live music venue, playing host to both homegrown and foreign acts, such as indie band Cut Copy and Icelandic DJ Páll Oscar. Doors open at midnight and admission costs 1000 – 3500 ISK.

See: nasa.is/


Budget: Kex Hostel

About 15 minutes’ walk from downtown Reykjavik, Kex Hostel is the place everyone is talking about. Only open since April, this former biscuit factory has become the drinking and sleeping venue of choice for Icelanders and backpackers alike. Dorm beds and private rooms start at 3800 ISK.

See: kexhostel.is

Mid-range: Guesthouse Butterfly

Located on a residential street within walking distance of downtown Reykjavik and Vesturbær pool, this cheerful bright green guesthouse is run by a Norwegian/Icelandic family. Sunny and well-appointed single, double and family rooms are available from 13000 ISK, including breakfast.

See: butterfly.is

Luxury: Hotel Reykjavik Centrum

Situated in renovated 18th century buildings above the 10th century Settlement Exhibition, pastel coloured Hotel Reykjavik Centrum could be mistaken for a painstaking recreation of 1900’s Reykjavik. Beautifully furnished ensuite single, double and deluxe rooms with full modern amenities start at 36600 ISK. Suites and apartments are also available.

See: hotelcentrum.is/