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Iceland in August

I am visiting Iceland for 8 days in August with my wife and two teenage sons. First night we will stay in Keflavik and visit the Blue Lagoon. For the rest of the trip we would like to rent an apartment in Reykjavik, tour the city for a couple of days and then rent a car and do day trips to locations north and south of the city. It seems that there are lots of things to see and do within a reasonable distance from Reykjavik. Has anyone done this type of trip in Iceland? Any suggestions on "must see" spots would be appreciated. I have read some of the Icelandic Sagas and am interested in visiting some historical locations. Thanks.

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While this seems like a good idea, it might also be good just to arrange a few tour-bus day-trips while you are there. Maybe even spend one day on a bus going up one of the unpaved rock paths across the interior of the country. Spend two nights in Akureri, then take a different bus route south. I would not do the unpaved roads by myself. Definitely, be sure to visit Thingvellir. If the weather is favorable, go enjoy Snaefellsjokull, near the site of Laxadale saga, etc. Contact the tourist office for the tour bus package routes, and then look them over to see which ones you can drive on by yourself.
Just be careful of Shop-keeper's-weekend holiday (Verslunamanna Helgi, or however it is spelled). It is traditionally the weekend in August with the last of the nice weather, so a lot of Icelanders travel and things are booked up that weekend if you didn't reserve in advance.