Launched in 2019, the prize is awarded every other year to an internationally renowned author who has contributed to the renewal of the art of storytelling.
It aims to promote the legacy of Halldór Laxness, an Icelandic writer and winner of the 1955 Nobel Prize in Literature.
In the jury's citation, member Salman Rushdie, who received the prize in 2024, said: "Olga Tokarczuk is simply one of the world's foremost living writers."
"In her work, tragedy, comedy, history and irony come together in an exceptionally rich literary blend. I am delighted that she has accepted the Laxness Prize. In doing so, she has honoured us all greatly," he added.
An awards ceremony will be held at Nordic House in Reykjavík on September 10.
Tokarczuk will be presented with a medal and EUR 15,000 in prize money.
Two of Tokarczuk's books have been published in Icelandic: Drive Your Plow Over the Bones of the Dead and House of Day, House of Night, both translated by Árni Óskarsson.
Tokarczuk won the 2018 Nobel Prize in Literature for what the Swedish Academy called "a narrative imagination that with encyclopedic passion represents the crossing of boundaries as a form of life."
Her novels translated into English include Flights, which won the 2018 International Booker Prize; Drive Your Plow Over the Bones of the Dead; The Books of Jacob; and, most recently, The Empusium: A Health Resort Horror Story.
Her new novel, Świata jest za dużo (provisional English title "There Is Too Much World"), is due out in mid-October.
(mk/ał)