ON A SCRAP OF 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."

FROM WHERE DOES this belief in the supernatural spring? Geography may play a part. Cut off from the rest of the world, Iceland missed the Enlightenment, which put science ahead of superstition in Europe. Modernity came late, too: A century ago, most Icelanders were still living in turf homes, eking out a living as fishermen or sheep farmers.

To cope with the isolation and the long, dark winters, the country evolved a rich storytelling tradition. Written in the Middle Ages, and still widely read today, the Icelandic Sagas turned Iceland's early history into a rip-roaring yarn of epic battles, pagan gods, magic spells, and ax-wielding Vikings. The same blend of fact and fantasy underpins the many folk stories about hidden beings. Over time, the line between enjoying the ancient tales and believing them seems to have blurred.

"Stories about elves and hidden people are part of our heritage, but I also like to think some of them are true," says one university student. "It's fun to believe in something you can't explain, and anyway, it's hard to be 100 percent scientific in a country as weird as ours."

Iceland, which is about the same size as Kentucky, has a strange, primordial beauty - geysers spray boiling water high into the air, earthquakes shake the ground underfoot, the sea crashes against a jagged coastline of bays and fjords. Much of the island is a treeless moonscape of vast craters, mountains, volcanoes, glaciers, hot springs, waterfalls, and fields of twisted lava rock. The topography is so lunarlike that the ­Apollo 11 crew trained here in the 1960s.

In this bizarre, Tolkien-esque world, the supernatural seems almost natural. With a straight face, Icelanders tell you that certain buildings in Reykjavik are jinxed, which is why shops never last long in them. Or they chat about the ghosts that live in their homes, offices, and factories. The media regularly reports on encounters with hidden beings.

Icelanders sprinkle their everyday speech with references to supernatural fauna. When a key or wallet gets mislaid, they blame the trolls. Someone who is lost or confused is said to look like an elf that has just come out of the hills.

Modern Icelandic art, music, and literature all have a whiff of the otherworldly about them - what one critic calls a "weird David Lynch ambience."

Just look at Björk, the pop world's ­surrealist-in-chief and a firm believer in elves. Or at chart-topping band Sigur Rós, which makes music full of ethereal wailing and moaning. "When you listen to it, you can hear the stones talking," one fan says. "It's like a dialogue with the elves."

Inevitably, the Icelandic love affair with the supernatural has a commercial side, too. Shops sell miniature statues of elves, dwarves, and other hidden beings. Towns peddle maps and tours of their invisible homes. Reykjavik even has an official Icelandic Elf School.

Opened in 1991 and housed in a drab office block, the school is stuffed with books about folklore and spirit traditions, as well as a small army of ceramic elves and gnomes. More than 9,000 people, most of them foreigners, have paid about $60 to attend a one-day course on the hidden beings. Local children also come here on field trips.

Magnus Skarphedinsson, the historian who runs the school, estimates that Iceland is home to up to 20,000 hidden beings. Most are benign creatures, he says, who live in harmony with nature. If provoked, though, they will strike back.

Skarphedinsson believes similar hidden beings exist around the world, which is why the drawings made by Icelandic psychics resemble images from other folkloric traditions. The dwarves in the Elfschool Studybook look very much like those in Snow White - short, bearded, and dressed in jaunty jackets and pants. Icelandic gnomes are not so different from the ceramic statuettes sold in every American garden center.

"Perhaps these beings are more visible in Iceland because we are more open-minded,"­ Skarphedinsson says. "We also live very close to nature, which is their home."

The hidden people, on the other hand, may be unique to Iceland. Skarphedinsson describes them as gregarious beings who look human, wear colorful, old-fashioned clothes, and can see into the future. They build invisible farmhouses and live to well over 100. Sometimes they materialize in our world to rescue a human lost in the snow or just to invite one home for coffee and pancakes. Skarphedinsson, who has never seen a spirit-being himself, claims three humans have actually married hidden people and vanished into their world.

Why these creatures eat pancakes and occasionally fall in love with mere mortals is anybody's guess. "There are thousands and thousands of unanswered questions," Skarphedinsson sighs.  

TRYING MY BEST to keep an open mind, I set off in search of a hidden being. Hafnarfjördur, a suburb of Reykjavik and renowned for having one of Iceland's largest colonies of elves and spirit beings, seems like a good place to start. My guide is Sibba, a middle-aged woman in a red elf hat. She tells me that visitors sometimes spot supernatural beings on her tours.

We walk through a typical Icelandic neighborhood of corrugated-iron houses huddled by the harbor. Sibba points out some rocks beside a driveway that are thought to be the home of a dwarf. She tells me that, years ago, a local man tried to pry them open with a metal spike, which snapped in two. Half of it remains lodged in the rock face, like King Arthur's sword in the stone.

I pull on the rusted spike, but it refuses to budge. We stand beside the rocks in a reverential hush, listening for I'm not sure what. There is no sound apart from the sighing of the wind.

Our next stop is a small park in the middle of a 7,500-year-old lava field. Sibba steers me toward a black boulder believed to be the home of another dwarf. He recently made himself visible to a tourist, she says, and complained to her about the noise in the park.

I knock on the boulder and listen. Then I ask the dwarf to show himself, or at least give us a sign. Again, nothing. "Maybe he is out," Sibba whispers.

Not everyone in Iceland believes in the elves and hidden people. Many think they do not exist at all, or that they are no more than an amusing bit of folklore or symbols of Mother Nature.

Even true believers cannot agree on how to interact with them. Erla Stefánsdóttir, Iceland's most famous psychic, sees hidden beings everywhere she goes, from her backyard to the parking lot at the local supermarket. Although she has published maps of their homes, she disapproves of guided tours.

"It is too much fuss," she says. "People should connect with nature by going into it and meditating rather than running around pointing at rocks and trying to see elves."

Maybe so, but a visit to Iceland somehow seems incomplete without at least one brush with the supernatural. To my relief, and astonishment, something straight out of The Twilight Zone happens to me on my final day.

The search for a last-minute souvenir takes me to an artists' cooperative housed inside an old fishnet factory in Reykjavik. It is a weekday, and the building is quiet. Eventually, a young man appears, smoking a cigarette, and suggests that I take a little tour.

I wander alone through a maze of half-lit corridors. Some of the rooms are empty. Others contain upturned furniture, scraps of wood, and curtains hanging from the ceiling. It could be a haunted house from central casting.

In the basement, things turn genuinely spooky. I feel that someone is watching me. I call out but nobody answers. A shiver trickles through me. I decide to leave, walking at first, then quickening the pace. By the time I reach the stairs, I'm running.

Smoking Man is waiting at the top, smiling triumphantly. "I see you met our ghost," he says. "Everyone here has felt his presence. He gets irritated and scares people."

I nod meekly. Anywhere else in the world, this would have been a cue to laugh or say something wry and skeptical. But the normal rules do not apply in Iceland, nor to its people - hidden or otherwise.



engineers reroute roads, pipes, and cables, often at great expense, to avoid disturbing the homes of hidden beings.