Iceland raised its alert over the nation's largest volcanic system to red on Saturday, banning all air traffic in the area, as experts deemed imminent the risk for an eruption.

A major explosion at the Bardarbunga volcano could signal a replay of the global travel chaos triggered when another Icelandic peak blew four years ago, creating a massive ash cloud across Europe.

On Saturday afternoon, the Icelandic Met Office (IMO) said it believed there was a small sub-glacial eruption, but in the late evening it confirmed there was no evidence of volcanic activity.

"Presently there are no signs of ongoing volcanic activity," IMO said on its website.

"The aviation colour code for the Bardarbunga volcano remains red as an imminent eruption cannot be excluded."

Although airspace was closed in the affected area, all airports in Iceland were open, authorities said.

The new assessment came after three hours of aerial surveillance of the area by experts.

"I can't assert that nothing has happened, but it's clear that there are no signs of melting that follows an eruption under a glacier, so the magma has probably not reached the surface yet," Magnus Tumi Gudmundsson, one of Iceland's leading geophysicists, told public broadcaster Ruv.

Police said some 300 people had been evacuated in a popular tourist area located north of the Bardarbunga volcano, which lies in southeast Iceland.

"This is quite an extensive evacuation, but it is only in the canyons themselves, not in the inhabited area," Husavi chief of police Svavar Palsson told local media.

"Most of the people were foreign tourists."

The authorities said they had decided not to evacuate residents of nearby areas, but encouraged them to be alert and have their mobile phones switched on at all times.

Iceland had raised its aviation alert to orange on Monday after Bardarbunga kicked into seismic action with the biggest earthquake registered since 1996.

- Flood risk -

Police said that the ice layer in the area was between 150 and 400 metres (500 and 1,300 feet) thick.

Local authorities fear floods from melting ice could cause serious damage to the country's infrastructure.

The eruption of Eyjafjoell, a smaller volcano, in April 2010 caused travel mayhem, stranding more than eight million travellers in the biggest airspace shut down since World War II.

"There's nothing we can do if we get another big eruption like that of Eyjafjoell except to interrupt air traffic in the dangerous areas," Icelandic Civil Aviation Administration spokesman Fridthor Eydal was quoted as saying earlier this week.

"It's really the only thing we can do," he said.

Bardarbunga lies under the country's largest glacier Vatnajoekull. The area around it is uninhabited, with only trekking cabins and campsites used by tourists and hunters in the summer months.

It is Iceland's second-highest peak, rising to more than 2,000 metres (6,500 feet), and caps the country's largest volcanic system.

On Monday, seismologists recorded an earthquake of 4.5 on the Richter scale in the area.

Scientists believe its explosion would be large enough to disrupt air traffic over northern Europe and the northern Atlantic, as well as causing major damage on the island nation from volcanic ash and glacial flooding.

In 2010, the Eyjafjoell volcano in the south of the island shot a massive plume of volcanic debris up to nine kilometres (six miles) into the sky, blowing ash across to mainland Europe.

And in 2011, Iceland's most active sub-glacial volcano Grimsvotn erupted, forcing Iceland to temporarily shut its airspace and sparking fears of a repeat of the Eyjafjoell flight chaos.

Iceland is home to more than 100 volcanic mountains, some of which are among the most active in the world.