There are many hot springs at Grafarbakki, in the parish of Hrunamanna. Not far from this is the farm called Reykjadal.
There was once a wise woman living at Reykjadal. She envied the mistress of Grafarbakki for her hot springs, which saved her firewood. She therefore conjured up a ghost and commanded it to fetch a good hot spring from Grafarbakki and bear it to Reykjadal.
The ghost went off, took up one of the hot springs, and bore it in its hands like a butter-church.
But when it was about halfway across the marshes above Gröf – no called Hvamm – it could endure the heat of the spring no more, and dropped it.
Ever since that day, it has been there, some distance from the other hot springs, and is known as the Ghost Spring.
This story is reprinted from the book, Ghosts, Witchcraft, and the Other World, Icelandic Folktales I by Iceland Review Library. It is full of great stories and you can find used copies online at Amazon.com or ABEbooks.com for $4 – $10.
If you want to know the scientific reasons for the little spring that is so far away from Grafarbakki, go to this LINK.
There is a great Icelandair Hotel Flúðir that is in the same location as this area of southwestern Iceland. It is nearby Eyrarbakki and The Húsið, Gullfóss, Geysir, Þingvellir National Park, and all the ”Golden Circle” locations.