Katla is one of Iceland's most active volcanoes with at least 20 eruptions in the last 1100 years. The volcano is covered mostly by the Mýrdalsjökull ice cap; consequently, Katla eruptions are phreato‐magmatic and are capable of producing jökulhlaups. A jökulhlaup in July 1999, preceded by an episode of continuous seismic tremor, was the first sign of renewed magma movement under the volcano since 1955. Using seismic and geodetic observations, and insights into geothermal activity from ice‐surface observations, we analyze this period of unrest and assess the present state of Katla volcano. From 1999 to 2004, GPS measurements on nunataks exposed on the caldera edge revealed steady inflation of the volcano. Our measurements show uplift and horizontal displacement of the nuntatak benchmarks at a rate of up to 2 cm a−1, together with horizontal displacement of far‐field stations (>11 km) at about 0.5 cm a−1 away from the caldera centre. Using a point‐source model, these data place the center of the magma chamber at 4.9 km depth beneath the northern part of the caldera. However, this depth may be overestimated because of a progressive decrease in the mass of the overlying ice cap. The depth may be only 2–3 km. About 0.01 km3 of magma has accumulated between 1999 and 2004; this value is considerably less than the estimated 1 km3 of material erupted during the last eruption of Katla in 1918. Presently, rates of crustal deformation and earthquake activity are considerably less than observed between 1999 and 2004; nonetheless, the volcano remains in an agitated state.