"RaggaKnits", a resident Icelandic knitter (and member of Ravelry, suggested her favorite yarn store, Nálin as a place I should visit while I was in Reykjavik.
Nálin, on Laugavegur 8, was within easy walking distance of the hotel where we were staying and we managed to reach there on Saturday afternoon just about an hour before they closed.
It is a small shop, but full to the brim with a nice variety of yarns and other craft notions. The staff were very friendly and very understanding when I explained that I was allergic to wool.
I am hoping that I'll be able to use it to knit up a scarf from one of the Icelandic lace patterns but either way, it's gorgeous stuff and I'm so excited to have found some yarn to purchase on my trip.
By the way, the Lett Lopi was only 200 Krona a ball (a little less than $2.00 U.S. at the current exchange rate).
I also took a look at the few pattern books they had with English Translations but decided to wait and see what I might find elsewhere. I could have spent at least another half hour in there just nosing around at the notions and such but it was approaching closing time and we were on a tight schedule so we moved on. But, if you ever find yourself in Reykjavik, do look this store up. It's a real gem.