Textiles do not usually preseve well in the ground as they is usually made out of organic fibers, although some of the more modern textiles, like nylon and fleece are inorganic and will probably be perfectly preserved in future archaeology. Some conditions are good for the preservation of textiles in Iceland, preferably areas that are deprived of oxigen, like bogs and wetlands. The textile bits in the picture above were found the other day at Alþingisreitur and they are from the 9-11th Century AD.
It has not been looked at by a textile expert yet, but at first glance it seems to have been woven. Most of the textiles that have been found from this era was woven, but some have also been single needle knitted. Knitting as we know it did not come to Iceland until the 16th Century, as far as we know. The oldest knitted garment found in Iceland was a mitten recovered at the excavation of Stóraborg which has been dated to early 16th Century.