Iceland Trip August Suggested itinerary?

"Is 7 days too short a timeframe to visit Iceland?"
It is too short if you want to see ALL of Iceland, but 7 days will give you enough time to see what Iceland is all about (and there is a good chance you may decide to go back for a longer period; that's what happened to me.)

A trip to the Blue Lagoon can be easily combined with when coming from the airport, or when leaving again. Check some options here: http://www.re.is/DayTours/BlueLagoon/

The most obvious '3 days scenic hiking trip' would be the famous hike from Landmannalaugar to Thorsmörk (or the other way). Yes, it is the most popular one, meaning you won't be alone on the trail, but there is a very good reason why it is so popular: it is unearthly beautiful. (Google "Laugavegurinn") or get a taste here: http://www.flickr.com/search/?q=Laugavegurinn.
Both Landmannalaugar and Thorsmork are connected by bus to Reykjavik. You most likely will need to bring your own tent since huts are probably fully booked.

Check the thread next to yours (about Landmannlaugar trek).
It's also easy to be outdoors just in Reykjavik
Reykjanes - the place between Keflavik and Reykjavik - is also an option.
Take free guides at airport - and you will be fully prepared to go. All walking paths are well marked - or marked well enough - to do the trek without a problem.
I would recommend one day walk around Reykjavik - http://fotki.yandex.ru/users/ruslendingar/view/186222?page=1 Sorry - text in Russian ... but the map - in English :))))
Full size maps - http://img-fotki.yandex.ru/get/3606/ruslendingar.5/0_2d76e_320f3a7a_orig (ring route)
And believe me - it will be a real OUTDOOR walk plus you'll see (sometimes) the town as well :-)

I recommend that you try glacier walk and ice climbing it is different and fun. Also there are many great waterfalls to see. And of course you should go to the Eyjafjallajokull glacier volcano area. If you are thinking about day tours I think you should contact TG-Travel (travel2iceland.is) they can make good tours for you.

Not a big hiker myself, but just wanted to say that yes, 7 days is too short, and no, 7 days is not too short. :-)

Yes it's too short because Iceland is amazingly beautiful and you won't be able to see the east or the north with only 7 days. Or you'd have to rush around driving the full circle (friends of mine did that in 6 days) but that wouldn't leave you any time for hiking.

But no it's not too short because very close to Reykjavik you will already find amazingly beautiful places: vulcanic activity, waterfalls, glaciers, moving continental plates... and Iceland is small enough to wander to one specific area (as suggested above) and do a real hike there.

So what I'm trying to say is you should really go if you have a chance, and you will probably end up wanting to go back again to see even more (as I did).

On my website you will find my Iceland itinerary, photos and tips.

I just got back from a seven day trip to Iceland. However, it was my second time there so we did skip over a few things. Also, it was mostly a driving trip with small hikes at most of our stops. Although hiking is wonderful, we chose to drive for most of the time to see as much as possible. I do plan on going back and I will probably hike a lot more.
Our itinerary was as follows:
Day 1: Bus from Keflavik to the Blue Lagoon then to Reykjavik>

Day 2: Full day in Reykjavik
Day 3: Rented a 4x4 and toured the Golden Circle (Thingvellir, Geysir, Gullfoss) and then camped in Landmannalaugar.
Day 4: Explored (relatively briefly) Landmannalaugar and Eldja. Seljalandsfoss, Skogafoss and Vík. We had to crash in Vík at about 9pm because we only had about 2 hours of sleep since we had left Reykjavik.
Day5: Laki, Skaftafell, Jökulsálron and arrived at Egilstaddir at 2:30am.
Day 6: Askja, Dettifoss, Asbyrgi, Godafoss, Myvatn(briefly) and Dimmuborgir. Arrived at Akureyri well after midnight.
Day 7: Akureyri to Keflavik.

While I am happy and satisfied with what we saw and did, we could have really used an extra week and probably more, to spend more time at all our stops and also to explore the Westfjords, but we were on a tight budget. Keep in mind though, that out itinerary was extremely packed. We only slept for 2 of the 5 nights on the road and we never had a hike longer than 2 hours.
I would recommend hiking where possible, but I believe a car, more specifically a 4x4, is necessary to see a lot the diverse natural beauty that Iceland has to offer.

Wow!
What did you do at Askja? Have you swimmed in Viti?
Although it's not a problem to drive around i such a time - I would advise others either to skip some places or take longer time to be able relax as well :-)
But anyway - I would encourage such visitors with offering 25% discount for car rent/accommodation in case they come back again (if I were in Icelandic tourist industry)