Allen, I planned to do the same thing for 2 weeks in 2004 when a full moon happened on December 26. I took all my gear for car camping. When I arrived the week before Christmas the temperatures were around 0* F at night, and not much higher during the 4 hours of daylight from 10 AM-2 PM. I stayed at my $250/night Borg Hotel room (great central location, by the way), with the idea that I would check out when the weather got better.
It really didn’t get a whole lot warmer, maybe 15-25* F at mid day. So I decided to blow off camping and I stayed in town and ‘hiked’ all around Reykjavik, eating great (and expensive) dinners and hitting the Blue Lagoon a couple times. There were bus tours to see sites within a couple of hours of Reykjavik, museums, etc. The city was amazingly lit up with all the X-mas lights – every home and business had lights, mainly because it is a tradition, but also because electricity is free in Iceland. The full moon was great, as were the northern lights and one beautiful nacreous cloud, and the people were happy and festive. But it was expensive.
One thing I noticed when we were taking bus rides to see the waterfalls and the original parliment site was how desolate the highway was. There was almost no other traffic. and towns and gas stations were few and far between. It looked pretty bleak, and a bit dangerous should one have car trouble. It didn’t seem like a 4×4 would really be necessary (but still, probably desirable), as the paved highway was clear, but any side roads looked fairly snow-packed and maybe impassable.
After 9 days like this, the tsunami hit SE Asia, so I decided I needed to get back home in case our Federal disaster medical assistance team might be called up to deploy. I was happy to stop spending all that money. Icelandic Air was great – they happily changed my flight, waived my excess baggage fee, and they sat me in first class (as did United when I changed planes in Minneapolis).
It was one of my more memorable trips, but not quite what I had planned for (I thought I would be camping, which would have been pretty brutal). One highlight was a whale meat dinner, with a side of hakaryl (sp?), petrified, uncooked shark meat, which you wash down with Brennivin (the excellent local schnapps).
All in all, it was something of an adventure. Iceland at Christmas is very special.