Deep crustal drilling in eastern Iceland has allowed study of a fossil hydrothermal system at a constructive plate margin. The drilled sequence consists of partly to completely altered subaerial lava flows, basaltic dikes, and minor clastic material. Alteration and secondary mineralization are most intense in the flow top breccias where water/rock ratios are presumed to have been the highest. In the upper portion of the cored sequence (to a depth of about 1200 m) alteration is characterized by the deposition of clay minerals ± calcite ± quartz ± laumontite into open spaces such as vugs and vesicles. Low‐temperature zeolites, such as stilbite, epistilbite, mordenite, and heulandite, are also present but are restricted to the upper 500 m of the drill core. Below 1200 m, alteration is characterized by the dissolution and replacement of both primary minerals and earlier authigenic minerals, followed by partial filling of dissolution cavities. Early mineral assemblages consist of epidote ± quartz ± prehnite ± chlorite ± albite, and a later superimposed assemblage consists of calcite + laumontite ± anhydrite. Authigenic sphene, pyrite, chalcopyrite, pumpellyite, actinolite, and wairakite also occur sporadically in the cored sequence. Secondary mineral assemblages and temperature measurements of fluid inclusions suggest a maximum temperature of alteration of about 300°C. Fluid inclusion compositions indicate that the geothermal fluid was meteoric water with very low salinities and high calcium activities. Iron activities and oxygen fugacities were highest in the deeper portions of the systems. The mineral paragenesis suggests that the fluid composition, temperature, and PCO2 varied significantly with time. The thermal energy for the geothermal system was probably derived from a high‐level magma chamber associated with nearby Thingmuli volcano. Local contact metamorphism, indicated by the formation of garnet, occurred during late stage emplacement of dikes into the lava pile. Chlorite ± calcite ± laumontite assemblages were also deposited along subvertical fractures at this time.