The volcano, which lies under the Vatnajokull glacier in south-east Iceland, last erupted in 2004.
In 2010, plumes of ash from Iceland's Eyjafjallajokull volcano caused weeks of air travel chaos across Europe.
Scientists say the latest eruption is unlikely to cause similar problems, although it may trigger localised flooding.
Volcanic eruptions are common in Iceland, which lies along the Mid-Atlantic Ridge that divides the Eurasian and North American continental plates.
Icelandic Meteorological Office geologist Hjorleifur Sveinbjornsson told Reuters that Grimsvotn had thrown a plume of white smoke about 15km (nine miles) into the air.
"It can be a big eruption, but it is unlikely to be like last year,
Last year's outpouring of ash from Eyjafjallajokull led to the largest closure of European airspace since World War II.
About 10 million travellers were affected and some questioned whether the shutdown was an over-reaction.
One eyewitness, said the plume rose quickly several thousand feet (meters) into the air.
Sparsely populated Iceland is one of the world's most volcanically active countries and eruptions are frequent.
Eruptions often cause local flooding from melting glacier ice, but rarely cause deaths.
Last year's Eyjafjallajokul eruption left some 10 millions of air travelers stranded worldwide after winds pushed the ash cloud toward some of the world's busiest airspace and led most northern European countries to ground all planes for five days.
Whether widespread disruption occurs again will depend on how long the eruption lasts, how high the ash plume rises and which way the wind blows.
In November, melted glacial ice began pouring from Grimsvotn, signaling a possible eruption. That was a false alarm but scientists have been monitoring the volcano closely ever since.
The volcano also erupted in 1998, 1996 and 1993. The eruptions have lasted between a day and several weeks.
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