"After seven good years at the KSI, I have decided not to continue as head coach of the national team," Hallgrimsson said.

"I feel... grateful for having been part of this strong team... that has opened doors for future generations and did so many things for the first time in history. It's a privilege to leave at this point when the players are at the top of their careers."

The 51-year-old specialist joined the national team in 2011 as an assistant manager to Lars Lagerback. Two years later, the two coaches signed a new contract as joint managers.

In 2016, Iceland became the smallest ever nation to qualify for a major tournament as they reached the quarter-finals of the European Championship before losing 5-2 to hosts and eventual runners-up France. Following the tournament, Lagerback took charge of Norway and Hallgrimsson was appointed Iceland head coach.

Under Hallgrimsson's management, the Nordic island country, with a population of around 350,000, became the smallest nation ever to qualify for the FIFA World Cup finals. Iceland failed to reach the knockout stage after holding Argentina to a 1-1 draw and losing their other two group-stage games in Russia.

"Heimir has done a great job," KSI president Gudni Bergsson said.

"The Icelandic football has never been so prominent. I would like to thank him for cooperation. The KSI will now take the next step and recruit a new coach."

The 2018 FIFA World Cup kicked off on June 14 and came to a close on Monday (AEST), with France beating Croatia 4-2 in the final at Moscow's Luzhniki Stadium.