Tomographic models based on hypothetically infinite frequency ray interpretation of teleseismic travel time shifts have revealed a region of relatively low P and S wave speeds extending from shallow mantle to 400 km depth beneath Iceland. In reality, seismic waves have finite frequency bandwidths and undergo diffractive wave front healing. The limitation in ray theory leaves large uncertainties in the determinations of the magnitude and shape of the velocity anomaly beneath Iceland and its geodynamic implications. We developed a tomographic method that utilizes the banana-shaped sensitivity of finite frequency relative travel times from the paraxial kernel theory. Using available seismic data from the ICEMELT and HOTSPOT experiments, we applied the new method to image subsurface velocity structure beneath Iceland. Taking advantage that the sensitivity volume of broadband waveforms varies with frequency, we measured relative delay times in three frequency ranges from 0.03 to 2 Hz for P and 0.02 to 0.5 Hz for S waves. Given similar fit to data, the kernel-based models yield the root-mean-square amplitudes of P and S wave speed perturbations about 2--2.8 times those from ray tomography in the depths of 150--400 km. The kernel-based images show that a columnar low-velocity region having a lateral dimension of ~250--300 km extends to the base of the upper mantle beneath central Iceland, deeper than that resolved by the ray-based studies. The improved resolution in the upper mantle transition zone is attributed to the deeper crossing of broad off-path sensitivity of travel time kernels than in ray approximation and frequency-dependent wave front healing as an intrinsic measure of the distance from velocity heterogeneity to receivers.