Which map did you download? If you downloaded or compiled a gmapsupp version and showed it in Basecamp, you will see the (very rough) basemap shining through the OSM map. Thats why it is likely that you saw water on the map, because the gmapsupp’s are (still) transparent and the basemap is not very detailed. With a experimental version of mkgmap this problem is solved. Try to compile your map with mkgmap-gmap-mdr-r2144.jar from http://www.mkgmap.org.uk/snapshots/ (this jar file must be put in the existing mkgmap directory if you use the iceland.osm.pbf).
Another option is to install the nsis version.

Hmm is this the same problem as you already asked in another topic: http://forum.openstreetmap.org/viewtopic.php?id=14485 ?