The lead isotope and trace element compositions of a suite of olivine-hosted melt inclusions in primitive lava flows from the Reykjanes Peninsula in Iceland show extreme variability. Much of this variability is present in the composition of inclusions from one hand specimen of Háleyjabunga, a depleted picrite lava shield that erupted 13 ka. 208Pb/ 206Pb compositions in this sample span 50–90% of the total range found in Atlantic MORB, indicating that high-amplitude compositional heterogeneity is present in the mantle source of melts that aggregated to form a single eruption. The trace element and isotopic trends in the melt inclusions are coincident with those in whole rock samples from young lava flows of the Reykjanes Peninsula, and extend the total range of variation towards more depleted compositions. The incompatible trace element and lead isotope compositions of the inclusions are strongly coupled and lie close to binary mixing trends between the extreme melt inclusion compositions. These relationships indicate that the trace element variation in the melt inclusions reflects heterogeneity in the composition of the mantle source entering the melting region under the Reykjanes Peninsula. Large positive Sr concentration anomalies are present in three of the inclusions, but do not correlate with indicators of mantle melting or source variations and are likely to arise by reaction with plagioclase during crustal storage. Fractional melting of heterogeneous mantle is predicted to generate melts with a wide range of compositions, filling a large volume in trace element–isotope space. However, the compositional variations observed in the melt inclusions lie close to binary mixing curves. These observations may be accounted for by a two-stage model of melt mixing. The first stage occurs in porous channels that transport melt in the mantle and takes place before inclusion entrapment. This mixing stage generates a bimodal distribution of melt compositions that is supplied from the channels to sub-Moho and lower crustal magma lenses. The second stage of mixing occurs in these chambers, producing the binary mixing trends recorded in the inclusion compositions. The distribution of isotopic compositions observed in the melt inclusions and whole rock samples from the Reykjanes Peninsula is therefore controlled by melt mixing. These results have important implications for the interpretation of basalt composition in terms of distinct compositional entities within the upwelling solid mantle under mid-ocean ridges and ocean islands.