Where is Middle Earth?
This is a link to a resource that can tell you more about Iceland.
Pictures are worth a thousand words
These are some pictures of Iceland...
These houses make me think of the hobbit holes in the Shire.
This white horse makes me think of the white horse that Ganalf rides.
This Icelandic mountain chain makes me think of the Misty Mountains where the goblins that the dwarves and Bilbo encounter are.
In conclusion, I think that Iceland is the best representation of Middle Earth because of it's similar land forms.