Sediment core MD99-2269, from the northern shelf of Iceland, has been studied to assess the stability of the East Icelandic–Irminger Current system during the Holocene. The 25.4 m long Holocene section was studied with a 40 years average resolution. The chronology is based on the combination of 24 14C AMS dates and two tephra layers. Diatoms are utilized to quantify the development and variability of the August sea surface temperature (SST) for the last 11.5 cal kyr BP. Three different transfer function methods have been used to reconstruct August SST at the site: weighted average-partial least squares (WA-PLS), maximum likelihood (ML) and Imbrie and Kipp (I&K). The combined use of the three methods allows the August SST reconstruction with a higher confidence level than with using only one statistical technique. These three reconstructions generate very similar August SST trends through the Holocene. The onset of the Holocene climate optimum is characterized at the site by a rapid August SST increase at 10.4 cal kyr BP of almost 4 °C. The Holocene climate optimum is recorded between 10.4 and 4.7 cal kyr BP. The August SSTs were around 2 °C warmer during the major part of the Holocene compared with the August SSTs for the later half of the Holocene. Combining the diatom record with the benthic foraminifera records from the same core enables us to reconstruct the evolution of both surface and bottom water masses during the Holocene. This reconstruction shows dominance of the Arctic waters throughout the water column at the onset of the Holocene, and subsequent increase of the influence of the Atlantic water, especially during the Holocene climate optimum. This strong dominance of Atlantic water tends to decrease between 4.7 and 2.2 cal kyr BP, especially in the upper part of the water column. Since 2.2 cal kyr BP the trend is reversed, suggesting an increased influence of Atlantic water at least in the upper water column.