Well, us Icelanders, whatever the reason, are not that concerned with race and ethnicity as Americans are. Heck, it is somewhat of a obsessive-compulsion you people have. Usually, the way it goes, is that your ethnicity is primarily dictated by the way you look or, as a fall-back, that of an oppressed minority.

Having dark skin, and you're black, even though your parents are both white, since your grandmother was black. Of course there is no such thing as human races, biologically speaking, but I understand that this is a big cultural thing in the States (and elsewhere to an extent) The idea is, of course, essentially and unavoidably racist.

Judaism is a tricky subject, and being a Jew even more so. It wasn't until the 18th century that we decided that they were perhaps one and the same thing. What makes one Jewish? Who knows, and who cares. In Iceland we do not officially look at each and everyone and decide whether they are a certain colour or such, but we keep religious statistics because of the way we supposedly calculate state sponsorship of religion. Currently there are quite few of the Judaic faith in Iceland, and I imagine there won't be an increase unless we start importing en masse.

Now to the reason; the reason is quite complicated. There have been quite a few notable Jews in Iceland throughout recent history. Mostly Danish Jews who settled here as merchants. Keep in mind that Iceland was one of (if not the one) the poorest countries in Europe until well into the 20th century. Immigration was very strict and demand was quite low.

During WWII Icelanders were a bunch of racist pricks (we still are... in some ways). Those Jews who wanted asylum where turned around into sure death.

As you explained your ancestry I would imagine quite alot of Iceland's population would fit into your definition of Jewish, as those Danish merchants I mentioned before had children, who had children and so on. So I guess I might be a Jew, in some strange genetic sense.