WOW, which focused on low-cost travel across the Atlantic, advised stranded travelers to seek flights with other airlines. It flew a total of 3.5 million passengers last year.
The company had earlier postponed flights on Thursday as it entered what it had hoped were the final stages of equity raising with a group of investors.
Founded in 2011 by entrepreneur Skuli Mogensen, WOW used smaller single-aisle planes to fly between Iceland and many destinations in the United States and Europe.
Norwegian Air has a little over half of the market share in the fast-growing, low-cost, long-haul transatlantic market, while WOW controlled a quarter in 2018.
Around 30 percent of tourists visiting Iceland last year flew with WOW and the collapse could trigger a 16 percent drop in tourists this year, research from Icelandic bank Arion showed.
(Production: Ilze Filks, Malgorzata Wojtunik)