The north Atlantic islanders, who became the smallest nation by population to qualify for the World Cup finals on Monday, have been placed in League A along with the likes of world champions Germany, European champions Portugal, Spain, Belgium, Italy, France and England.
Iceland also reached the quarter-finals of Euro 2016 having beaten England -- the first major tournament they qualified for.
European confederation UEFA announced the four leagues for their new competition on Wednesday, following the conclusion of the groups stages in the World Cup qualifying campaign.
Switzerland, Poland and Croatia are also in League A as are the Netherlands, despite missing out on the World Cup.
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The four leagues, which will be split into groups of three or four teams at a draw in Lausanne in January, were decided by the UEFA national team coefficient rankings of Europe's 55 nations.
Matches will take place over six matchdays from September to November next year with the four League A group winners contesting the finals in June 2019.
UEFA's Nations League is designed to replace "meaningless" friendly internationals with competitive matches against teams of similar standing.
League B contains the likes of 2018 World Cup hosts Russia and Sweden, Denmark, Ireland and Northern Ireland; all of whom are in the playoffs for the World Cup.
Serbia, who qualified for the World Cup, are down in Group C with the likes of Bulgaria, Slovenia, Hungary and Greece.
League D contains the so-called minnows of European football such as Luxembourg, Malta, San Marino and Andorra.
Promotion and relegation will come into play for the second edition of the Nations League starting in 2020.
(Reporting by Martyn Herman; Editing by Christian Radnedge)
