PHeymont has given you some excellent advice, Travel Luver. By all means, spend some time in Iceland. If you can fit it into your trip, 4 days would be my minimum stay here.
As Paul pointed out so well, Iceland is unique. It is also very sparsely populated, with only 300,000 people on the island and two thirds of those living in Reykjavik. And it is a newly form volcanic land with tons of glaciers, waterfalls, and geothermal events. So by all means, see it.
When you land at Keflavik airport (it will be bright and early after your red eye flight), take the Flybus airport shuttle into the city. Here's theirlink On a tight budget, I'd look at spending some time in one of the city's many nice hostels. You'll save some cash and get to meet young travelers from all over Europe. I'd probably recommend 2 days in and around Reykjavik, as well as two day trip bus excursions, one to the Golden Circle and one to South Iceland. Reykjavik excursions, the company that runs the Flybus, has several good quality tours. Here's that link. PHeymont may know of others as well.
I like Paul's suggestion of focusing your time in Spain on Barcelona as well. Bon voyage!