In order to study climate variability and change in the northern North Atlantic Ocean, short duration integrations of Polar MM5 have been performed for 1991-2003 with 3 interacting grids, the inner most centered on Iceland with 8 km resolution. The initial and boundary conditions are supplied by the operational analyses from the European Centre for Medium-Range Weather Forecasts. From comparisons of model output with numerous station observations, the model is shown to perform with high skill on monthly time scales in this strongly synoptically forced environment. A pronounced katabatic wind circulation is present during winter whereas a diurnal land-sea breeze circulation occurs during summer. The North Atlantic Oscillation is found to strongly modulate the climate during winter and summer, but in opposite ways. A strong downward trend in simulated winter and annual precipitation is found that results from an eastward displacement and weakening of the Icelandic low.