The company said it made the decision after Greenpeace alerted it to the devastating effect the growing demand for palm oil was having on tropical rainforests across Southeast Asia.
Forests are being chopped down to make way for palm oil plantations which has led to wildlife being displaced.
The Indonesian orangutan population has been particularly devastated by the destruction.
Palm oil is currently found in half of all supermarket products, from bread to biscuits and breakfast cereal to soap.
Iceland’s ban on palm oil only applies to own-brand products meaning that some products sold by the retailer by different brands may contain the ingredient.
Iceland Managing director Richard Walker said: “I recently went to Indonesia to witness first-hand the environmental devastation caused by the expanding palm oil industry.
“I feel passionately about the importance of raising awareness of this issue I know many British consumers share my concerns and want to have a real choice over what they buy.
“Currently no major supermarkets or food manufacturer can fully prove that the palm oil they use is fully sustainable.”
Some 130 products will have been reformulated by the end of the year the company said.
