A new cyanolichen, Peltigera islandica sp. nov. in the section Peltigera (‘P. canina group’) is described from Iceland. This species is similar in general appearance to P. rufescens and P. membranacea, but may be recognized by its downturned lobe tips and narrow lobes, respectively. Most thalli are bright emerald green in colour when moist, although a dark khaki green colourmorph is also documented. Monophyly of P. islandica s. lat. (i.e. including P. sp. A sensu O’Brien et al., from Canada) is significantly supported based on ITS sequences and corroborated by molecular synapomorphy (absence of the ITS1 hypervariable region). Analysis of the rbcLX locus indicates the cyanobiont of P. islandica (Nostoc sp.) comprises strains belonging to a pool of Icelandic genotypes, some of which are present in other Peltigera species, including P. “neorufescens”, another taxon new to Iceland collected during this study. Association with photobionts that are shared by other local species suggests P. islandica may be well established in Iceland, but a review of herbarium collections as well as broader field surveys are needed to better characterize its geographical distribution.