• Image about Icelandic Elf School

Why does one of the most modern countries in the world still believe in the supernatural? Because if you ignore them, elves and gnomes get so angry.

On a tarmac behind a school on the outskirts of Reykjavik, a pickup soccer game is in full swing. Little boys race back and forth, yelling, laughing, and celebrating each goal with air punches.

But when a misplaced pass sends the ball spinning toward some large rocks nearby, the gaiety stops. A sign hammered into the grass warns that three elves live inside the stones - and that humans should approach with caution.

"I don't like going on the rocks," says Tomas, a streetwise 12-year-old. "If the elves get angry, they could set fire to my house or make me sick. Or they could make my computer break down."

Welcome to Iceland, a small island republic where surfing the Internet goes hand in hand with a belief in the supernatural.

Nestled just below the Arctic Circle, Europe's most remote nation is a model of modernity, mostly free from poverty and illiteracy, in thrall to cell phones and laptops. Yet a majority of Iceland's 296,000 citizens believe they are not alone, that this wind-blasted island in the North Atlantic is teeming with spirit beings more often found in fairy tales and Disney movies.

The cast includes elves, trolls, gnomes, light fairies, and mountain spirits, as well as 13 evil Santas who wreak havoc at Christmas. Oh, and don't forget the "hidden people," a race of friendly humanoids who dress like characters from Little House on the Prairie.

"Iceland is probably the strangest country in the world," a local entrepreneur tells me. "On the surface, we look very modern with all our technology, but underneath, we are still peasants who believe all kinds of crazy stuff."

According to lore, Iceland's hidden beings inhabit a parallel world invisible to human eyes. Only psychics, and sometimes small children, can see them - unless the supernatural beings choose to reveal themselves.

Outsiders may snigger, but hidden beings are a serious matter here. Among the textiles, ceramics, and other artifacts on display at the National Museum of Iceland in Reykjavik, there is a small, black, cast-iron pot. A label says it may have belonged to a little elf boy.

In the same way that some Americans dabble in feng shui, Icelanders hire elf spotters to sweep land earmarked for development. Engineers reroute roads, pipes, and cables, often at great expense, to avoid disturbing the homes of hidden beings. The street that runs past the schoolyard where Tomas and his friends play soccer bends to avoid the rocks said to house the three elves.

Annoying the hidden beings carries a heavy price. Tales abound of fishermen going missing at sea after ignoring warnings from elves to stay in port. Or of construction projects plagued by illness, mechanical breakdowns, and cost overruns.

Last year, crews building a golf course on the outskirts of Reykjavik moved a rock believed to be an elf dwelling. Soon after, bulldozers failed and workers succumbed to mysterious injuries. Eventually, the chief engineer caved: With journalists looking on, he issued a groveling apology to the elves and promised not to bother them anymore. The mishaps stopped and the course was finished on time.

"Even Icelanders who don't believe in elves and hidden people often consider it safer to behave as if they might exist," says Olafur Stephensen, deputy editor of the country's leading newspaper. "That way they don't risk offending them."