The envoy, Ma Jisheng, has not been replaced, and Reykjavik has been informed only that he was unable to return for "personal reasons", foreign ministry spokesperson Urdur Gunnarsdottir told AFP.
Icelandic media reports claimed that the ambassador and his wife had "disappeared".
Hong Kong's Ming Pao daily, citing US-based Chinese-language website Mingjing News, said Ma and his wife "were suspected of giving state secrets to Japan and were arrested (in early February) by the Ministry of State Security."
Ma was a high-ranking diplomat in Japan from 2004-08.
A Chinese foreign ministry official was unable to shed further light on Ma's whereabouts at a press briefing in Beijing on Wednesday, telling reporters: "I have no information on this."
The Chinese embassy in Iceland has refused all media requests for comment, and its website has a blank space where the name of the ambassador would normally appear.
Iceland's strategic location close to Arctic oil and gas reserves as well as new Arctic maritime routes has led to closer diplomatic ties with China.
It entered a free trade agreement with Beijing in April 2013, the only European country to do so.
COMMENTS
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ