Police guarding the US embassy in Stockholm during a bomb scare (Sept 2010)
Norway, Denmark, Sweden, and Finland are already investigating whether US embassies are acting illegally.
The allegations began when Norwegian TV claimed protesters were photographed and their names added to a database.
The US says it runs a legal counter-surveillance programme in response to security threats to its embassies.
Although US embassy officials in Reykjavik have denied any espionage is taking place, Iceland's ministry of justice says it has asked the national police commissioner to carry out a fact-finding inquiry.
The ministry said it was responding to revelations in Scandinavia "that US embassies conducted surveillance inside the countries without permission from state authorities".
US officials say they stand ready to discuss the matter "in government to government channels".
East African attacks
US State Department spokesman PJ Crowley explained in Washington earlier this week that counter-terrorism measures related to attacks on US embassies in Kenya and Tanzania 12 years ago in which 250 people died.
"We have acknowledged that we have a programme around the world where we are alert for people who may be surveilling our embassies because we recognise that they are potential targets of terrorism," he said.
But the report on Norway's TV2 channel claiming that hundreds of Norwegians had been monitored by former police and armed forces personnel alarmed neighbouring countries.
Sweden's Justice Minister Beatrice Ask has claimed that people linked to the US embassy in Stockholm have performed surveillance since 2000 without fully informing Swedish authorities.
She has described the revelations as "very serious".
Her Danish counterpart Lars Barfoed said that security police would meet US embassy officials in Copenhagen to ensure no laws were being broken.
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