The Icelandic government is taking legal action against the supermarket chain Iceland in a trademark dispute over using the name, it has confirmed.
The store, which specialises in frozen food and has its head office in Deeside, Flintshire, has been trading under the name for 46 years.
It owns the European trademark for using the name Iceland, which Icelandic officials claim the firm defends "aggressively".
The company said it regretted the move.
The Nordic nation confirmed on Thursday that it had mounted a legal challenge against the food store at the European Union Intellectual Property Office.
It said it hoped to ensure "the right of Icelandic companies to use the word 'Iceland' in relation to their goods and services".
In a government circular, officials stated: "The government of Iceland is concerned that our country's businesses are unable to promote themselves across Europe in association with their place of origin - a place of which we are rightly proud and enjoys a very positive national branding.
"This untenable situation has caused harm to Icelandic businesses, especially its small and growing companies."
The Icelandic government said it had made efforts to negotiate with Iceland Foods, but said it had been met with "unrealistic and unacceptable" demands.
The claim is disputed by the supermarket, which has more than 800 stores across the UK and employs more than 23,000 staff.
"Contrary to their assertion we have received no recent approaches to achieve an amicable resolution of this issue, which would be our preferred approach," a company official said.
The firm insisted it would "vigorously defend" its established rights, adding: "We have been trading successfully for 46 years under the name Iceland and do not believe that any serious confusion or conflict has ever arisen in the public mind, or is likely to do so.
"We hope that the government will contact us directly so that we may address their concerns."