Obviously I visited a few yarn shops…
Right on the main street, in the shopping arcade above the Bonus supermarket. Head up the stairs directly opposite the entrance and hello yarn! Sells a good range of the local Icelandic yarns and overseas imports, notably Brooklyn Tweed Loft and Shelter, plus plenty Rowan and other recognisable brands.
Approximately 30 minutes walk from the centre, follow the main shopping street for ease. Again a good selection of yarns, including the local and the not-so-local. Carries the Snaeldan Faroese yarns (I picked up some of the 2ply fingering and worsted weights). Also has Dye for Yarns! And some great buttons (too many to choose from) plus some other good knitting supplies and accessories. Well worth the walk (even if it snows).
Lopi heaven! Carries the full range of the Icelandic yarns – Plütolopi, Lett-lopi, Einband, Alafoss. Plus all the pattern books and some other local yarns.
Many tourist shops also sell the lopi yarns but be aware that many of these have had the prices marked up – especially on the kits.