What's the best way to move about in Iceland?

How expensive is the car rental, though? And are you five adults or are some of you kids? Because although the buses and tours can be very inexpensive, it does start to add up for that many people. I agree with the others that you don't need a car to do what you're proposing, but you probably should price it out. The Blue Lagoon is nearer to the airport than it is to Reykjavik proper, so most people take it in on their way to or from the airport, and there are buses that take you from Reykjavik to the Blue Lagoon, keep your luggage on the bus, and then they take you the rest of the way to the airport. The Blue Lagoon has the http://www.bluelagoon.com/Geothermal-spa/How-to-get-there/Bus/ for both Iceland Excursions and Reykjavik Excursions (two of the big tour companies), but also this is something your hotel could totally easily book for you.

Seconding that there is a big difference in quality between different tour operators. I did a day trip with Reykjavik Excursions and basically all it was was a bus ride from one Golden Circle location to the next (including a geothermal power plant, where we watched a powerpoint presentation about geothermal power). No real added value, plus the people on that bus were whiny! But it was probably the cheapest way for two people to do the Golden Circle. On my second trip to Iceland I took a tour with Goecco, with a really knowledgeable guide who took us off the beaten path and showed us things we would not have found driving around on our own. Completely different experience (and correspondingly much more expensive).

If you are only there for two days and have 5 people, renting a car will be cheaper than taking a shuttle to and from the airport. I used http://www.icelandcarrental.is/Booking as it was cheap and flexible. Iceland Car Rental met us at the airport at 5am and then 3 days later just picked up our car off of the street in Reykjavik. I had rented with Hertz in the past but had to wait for their rental desk to open and had to return the car to their terminal at the smaller airport in Reykjavik. The first time I went there, I was stressed out about parking, since it's all metered along Laugavegur in the city center. But if you go a few blocks up the hill, near Hallgrimm's Church, there's a lot of unmetered street parking, especially at the apartment blocks on the side opposite the city center. With only two days you can see a lot of varied countryside if you want, and a lot of it can be seen without being surrounded by other tourists. From Keflavik airport, with a car, you can immediately drive up the 45 through Gardur to the 402. The tip of the peninsula is beautiful, and there are two enormous lighthouses. There are lots of very old churches along the way. The loop down to Grindavik on the 425 and then back up on the 43 is pretty nice too. Hafnir is on the way down the 425 and you can stop to walk to a bridge that crosses the European and North American tectonic plates. North of Reykjavik, take Hwy 1, then take a right on 47 instead of going through the tunnel under Hvalfjordur. This is a beautiful fjord to drive up. About 5-10 (maybe more?) miles down that road, there's a new national park on the right that has some great hiking through actual trees! At the very end of the fjord there's a road that leads to a trail that leads you to Iceland's highest waterfall. Wear hiking boots! There is now a nice map there that tells you how far it is. Sometimes the footbridge near the end is impassable so you might not actually get to see the waterfall. But on a clear day you can at least see a massive mountain inland. Loop back around the top of the fjord on 47 until it hits Hwy 1 again, and either take the AWESOME tunnel back underneath the fjord, and back to Reykjavik, or go north to Borgarnes. There's a Saga Museum there that was cool, and the town itself was fun to walk around.

There are buses that will take you to the Blue Lagoon and around the http://www.re.is/. Reykjavik proper is small enough to walk around.

Yeah you won't need a car. We rented one from Hertz and enjoyed the freedom but we could have easily seen the sights just using coaches and Reykjavik is eminently walkable.

There are tours that will take you to the Blue Lagoon & Reykjavik is very walkable. You don't need a car. Have a Skyr cake at Loki Cafe with a coffee for me.

We just want to see The Blue Lagoon, hang out in the city, eat some good food, and maybe see one or two of the things on a standard list like this. There are a plethora of buses and tourism companies that will take care of all of that for you. The tourist companies will even pick you up right from your hotel and take you to the activity and provide you with any necessary equipment. Even if you did rent a car, you wouldn't have a chance to use it.

you won't need a car for getting around Reykjavik, but the bus tours for the golden circle can be fairly expensive themselves, especially with 5 people, so you may want to weigh some pros and cons for that. the blue lagoon is much closer to the airport than Reykjavik proper, so the cheapest way to get there is going on the day you fly out (since you will probably already be paying to travel to that area) on preview: I second exactly what mskyle said.

Nthing you don't need a car to do any of the standard stuff. A bus will take you to the Blue Lagoon, which you should really only do to/from the airport (in my opinion at least, but I found the Blue Lagoon thoroughly underwhelming and there is no way I would recommend a special trip that is not part of the trip to/from the airport; on the other hand, it can be a nice way to entertain kids for several hours, so there's that). One thing to consider, though, is that some tours are better than others, and while you can do the bus tours that will take you to the Golden Circle, and do them fairly cheaply, by the time you multiply all of that by five, you won't be saving THAT much money over the price of a rental and you'll be stuck on a tour bus doing the cheapest Golden Circle tour possible. All of the nicer Golden Circle tours are pricier. Renting a car and driving around in Iceland is an easy experience (albeit not cheap) and I'd ordinarily recommend driving if it's feasible. But since this is a two day layover and not some full-on Icelandic Adventure, by far the easiest thing is to just do the bus tour. They'll pick you up either at your hotel or some other easy to reach Reykjavik landmark, you won't have to worry about a thing, and you'll save some money. Which you'll wind up leaving in Iceland anyway to pay for food, since decent food is hellishly expensive.