Iceland was neutral during the first years of WW2 and later Britain occupied it and gave it to USA. Even Iceland had some business relations with Germany it hardly can be the moral reason that Iceland should uncritically support all insane Israeli policies. The two state solution means that there are two states. Iceland understands it, Israel not.
German finance minister says need to limit number of refugees coming to Europe (Reuters)
from the article: Iceland formally recognizes Palestinian state within 1967 lines