The Icelandic Meteorological Office said gas pollution could hit the Icelandic capital after the volcano began erupting late on Monday.
The volcanic eruption on the Reykjanes Peninsula in southwest Iceland came after weeks of earthquakes and strong shaking.
Smoke could reach Reykjavik on Tuesday night or Wednesday morning.
Around 4,000 people were evacuated last month from the fishing town of Grindavik, which was threatened by lava flows.
Residents living near Grindavik described "crazy" and "horrifying" scenes on Monday night and said they could still see the volcano erupting on Tuesday.
Iceland has been preparing for volcanic activity for several weeks. Since the end of October, seismic activity has increased in the Reykjavík area.
The eruption can be seen from Reykjavik, about 42 kilometers northeast of Grindavik.
Witnesses in the capital told the BBC that half the sky towards the city "lit red" as the volcano erupted and smoke could be seen billowing into the air.
In 2010, a volcanic eruption sent plumes of smoke kilometers into the atmosphere, disrupting air travel in Europe for several days.
Volcanologist Dr Evgenia Ilyinskaya told the BBC that there would not be the same level of disruption as in 2010 because these volcanoes in southwest Iceland "physically cannot produce the same ash cloud".
Dr Ilyinskaya, an associate professor of volcanology at the University of Leeds, speaking from Iceland, said local residents were "waiting with fear" for the eruption.
She added that authorities were preparing for a lava flow that could destroy homes and infrastructure, including the Blue Lagoon, a popular tourist destination.
"There is no threat at this time, but we don't know yet," she added.
The Icelandic Meteorological Office announced at 12:30 pm Japan time on Tuesday that the eruption had weakened, but gas was still gathering from the volcano.
Oliur Halldrsdóttir, a resident of Sanjeloj, about 20 kilometers from Grindavik, said he watched the eruption from his home.
She told the BBC: I had seen volcanic eruptions before, but this was the first time I felt real fear. ”
"We're used to volcanoes (eruptions), but this was crazy."
She added that there was some "panic" on Monday evening and she bought more water, but by Tuesday the situation was almost back to normal.
"I'm at work right now, but I can still see. I can see the light in the sky," she said.
Hans Bella was evacuated from Grindavik last month, but before Monday's eruption he had hoped to return home by Christmas.
But he said: "We are going back to the waiting game because I don't think we will ever allow people near Grindavik again."
"Flights to and from Iceland are unaffected and international corridors remain open," Icelandic Foreign Minister Bjarne Benediksson said on Twitter.
"The jet (of lava) is so high up that it initially looks like a powerful eruption," he said.
Photos and videos posted on social media showed lava spewing from the volcano just an hour after the earthquake swarm was detected.
Police warned people to stay away from the area.
The volcanic fissure is about 3.5 kilometers long and the lava flow is between 100 and 200 cubic meters per second, the meteorological agency said, adding that this is several times faster than the recent eruption on the Reykjanes Peninsula.
Iceland's Prime Minister Katrin Jakobsdottir said the newly built defense system would have a positive effect.
Her thoughts are with the local community and she said she was hoping for the best despite the "big incident".
President Gudni Johansson said that while saving lives is the top priority, every effort will be made to protect buildings.
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