The FutureVolc project, funded by the European Union, uses more sensors as well as better real-time data analysis. The project is in direct response to the 2010 eruption of the Eyjafjallajokull volcano, which spread an ash cloud that closed down much of European airspace.
The upgraded system should provide better detection of imminent eruptions, scientists said.
"Volcanoes actually scream 'I'm about to erupt'," Matthew Roberts of the Icelandic Meteorological Office told the BBC.
"Before they erupt they show many measurable signs, and it's the challenge for today's vulcanologist to actually gather all that information and make use of it in real time and that's exactly what FutureVolc is about."
Additional monitoring sensors will be placed in the most volcanically active areas of Iceland, including around the Eyjafjallajokull site and Katla, one of the country's largest volcanoes.
Real-time data from the sensors will be sent to IMO headquarters in Reykjavik to be analyzed for tell-tale signs of any imminent eruption, the researchers said.