KOPAVOGUR, Iceland - In this small city just south of the capital Reykjavik, a two-lane street in a quiet residential area abruptly loops and narrows to avoid a small hill dotted with lichen-speckled rocks. The diversion seems inexplicable, but anyone around here will tell you the reason:

Elves live in those rocks.

There are many such spots in Iceland - houses with distorted walls, narrowed driveways, and roads suddenly split in two - all to accommodate the huldufolk, or "hidden people," Icelanders name for elves.

In two previous trips to Iceland, I had encountered this quirky belief in the supernatural. So, when I read late last year that the Iceland Supreme Court had blocked a major highway project, partly to determine its impact on elves, I decided it was time answer this question: How can this nation of 325,000 people - one of the most literate, educated, technologically advanced countries in the world - have so many citizens who believe in elves?

My first stop is the detour in Kopavogur, where Terry Gunnell, a folklore professor at the University of Iceland, points to the largest rock on the hill.

"Back in the 1970s, road builders wanted to move this to make way for the street," he explains, "but they kept running into equipment breakdowns and accidents. Some local people claimed elves lived in the rock and were responsible for the problems. The mishaps continued, and it became big news. Television crews came out, but their cameras wouldn't work. Finally, they gave up and looped around the hill."

The difficulties at Kopavogur were documented by Valdimar Hafstein, an academic folklorist, who published an article in the Journal of Folklore Studies in 2000 based on interviews with 35 "elf-harried road workers and other participants in projects with which elves are supposed to have interfered." The article concluded that while elf belief had all but disappeared in most of the world, "elves are alive and frisky in modern-day Iceland."

Iceland's huldufolk are not the minuscule, green and pointy-eared figures that most cultures associate with the word elf. Rather, they are usually described as beautiful beings, similar in size to humans, clad in colorful, old-fashioned clothes.

In 2007, Gunnell led a survey that found 3 percent of Icelanders claimed to have had personal encounters with elves, 8 percent said they believed in elves, and 54 percent would not deny elves existed. The results were consistent with previous studies.

Because of the huldufolk, construction of not just roads but factories, dams, and shopping malls has been modified to protect elves or delayed to give them time to move. Indeed, before any major project can proceed, consultants with clairvoyant skills are brought in to ensure there is no adverse impact on elves.

Gunnell, who came here from England some 35 years ago, says most Icelanders do not think creatures live in those rocks and come out to dance and play. Instead, he said, "it's a sense that there are other forces everywhere, and a lot of this has to do with the land."

Indeed, nature stands on tiptoe in Iceland, sometimes called "God's National Park." There are roaring waterfalls, deep fjords, mossy lava fields, glaciers, eerie glacial lagoons, active volcanos, bubbling geysers, and towering cliffs. There is a surreal, Middle Earth aura that seems a breeding ground for the supernatural.

"Icelanders' houses can be knocked down by a force they can't see - an earthquake," Gunnell says. "The wind can literally knock you off your feet. The kitchen taps smell like sulfur because there's lava just below your feet. The world's biggest television show is the Northern Lights. Five years, ago we had a volcano erupt that disrupted air travel all over Europe."

Does Gunnell believe in elves? "I've never seen one," he says. "That's the only answer I can give you."

My next stop is the Alfaskolinn, or "Elf School," which shares office space with a psychic center in a bland building east of downtown Reykjavik. I am welcomed by headmaster Magnus Skarphedinsson, a big man with fingers like sausages, the physique of a sumo wrestler, and a laugh that could be measured on the Richter scale.

He says he has interviewed some 800 Icelanders who have "had personal contact with the elves themselves, and many of them have been invited into the homes of the elves and the hidden people in Iceland, and have often eaten food there and sometimes also slept there during one or more nights."

Skarphedinsson opened the Elf School in 1988 in response to growing interest among tourists in the elf phenomenon. He says about 9,000 people, mostly Scandinavians and Germans intrigued by the paranormal, have received certificates for taking the four-hour course.

The classroom is a chaos of boxes piled high to the ceiling, hundreds of books stacked on the floor, shopping bags filled with files and documents. Extension cords snake around the piles. An ancient sewing machine sits on a shelf. Randomly, there is a fire extinguisher, a sled, one ski. Plastic elves and elf puppets gaze down at elf lampshades and plastic flowers.

Five students - two Germans, two Americans, and a Canadian - have each paid about $50. Skarphedinsson tells them he's been collecting huldufolk stories for 38 years, that most people had encounters with elves as children, and that there are some 20,000 elves in Iceland, who are, for the most part, harmless and gentle.

What do elves look like? "They're the same size and look exactly like human beings," he says. "The only difference is that they are invisible to most of us. They have livestock, fishing boats, churches. There are Christian elves. There are gay elves. They are a bit like Icelanders from two centuries ago. They represent the good, old-fashioned days and ways."

Do you believe there are elves, he is asked? "I've never seen an elf. I've never seen a Mexican, either, but I know people who have, and so I believe there are Mexicans."

In the latest huldufolk controversy, elf believers teamed with environmentalists to block a highway project through a picturesque lava field in the Alftanes peninsula. Elf advocates claimed the construction would disturb a 30-ton boulder that was an elf church. Environmentalists said the work would destroy a lava field that was a culturally significant landmark - and they stood in front of bulldozers to make their point.

In April, the Supreme Court intervened and ordered contractors to move the boulder-church away from the road before work could continue.

Six months later, Bryndis Bjorgvinsdottir looks at a completed section of the new road. "It's like a wound," she says, wrinkling her nose in distaste.

For several years, Bjorgvinsdottir, a folklorist at the Iceland Academy of Arts, and a photographer have been documenting elf sites.

She drives into a factory parking lot where a long row of lined spaces is interrupted by a rock. "This was built in the 1970s, and whenever they tried to move the rock, the machines would malfunction. So they left it here," she says. "When we were photographing it last year, there were some workmen over there" - she points to a doorway - "and they pleaded with us not to disturb the rock in any way lest we create problems."

Bjorgvinsdottir started the project after Iceland's economic meltdown in 2008 resulted in a boom in tourism because of a favorable exchange rate.

"The Tourism Board decided to come up with ways to get people to come here," she says, "and the elf thing was one of their ideas."

Billboards began appearing on the main road from the airport to Reykjavik offering tours of elf villages. People painted little elf doors on rocks. Vendors touted T-shirts that said, "I had sex with an elf in Iceland . . . 5 minutes ago."

"I didn't want elf belief to be trivialized," says Bjorgvinsdottir. "They represent nature in our culture. This explains why we had people who see elves demonstrating side by side with environmentalists against the Alftanes highway. The road goes right across one of the most interesting, sensitive, and beautiful lava fields in Iceland. This fairy-faith is therefore never only about elves, but about humans and how we choose to live with nature."

She has found sites all over Iceland, about 40 so far. A hospital in Selfossi canceled an expansion when attempts to move a rock caused communications problems throughout the hospital.

On a road near Sjagafjordi is a blind spot. "They tried to flatten the hill in 1978 to eliminate the blind spot," she says, "but gave up after road crews reported strange things happening to equipment."

Last year on the island of Heimaey, a doctor tried to add a patio to his house, but the equipment kept malfunctioning and he canceled the project.

Sadly, I did not see any elves during my visit to Iceland, so I can't vouch for their presence. So I ask Bjorgvinsdottir, do you believe elves exist?

"The question isn't whether elves exist," she answers. "Elf belief itself can give us information on our modern lifestyle, and even express doubts about our modern lifestyle and how unsustainable we have become. They are a part of a shared cultural history, and therefore they exist - whether or not anyone believes in them."