I am planning on a circumnavigation of Iceland this summer and the Ring Road might be the only road available for lenghthy stretches. I would like to know if camping along the Ring Road is permissable, especially once I get out into the more remote areas. I would also like to know if ground/river water is safe to drink without purifying.
Wild camping is permissible as long as you maintain a respectful distance from homes etc, but in some places it might difficult to find good spots to put up a tent close to the road. Based on my experience, the best spots are found taking side roads a little bit off the main ring road. Near populated areas you can usually find official camping sites (check the link provided by HaLaBi).
The water from small creeks/rivers is almost always safe to drink without purification as long as you avoid getting it downstream from habitations.