When Graham Hall started out as a trawlerman, the port of Grimsby was crammed with so many boats that local legend had it you could walk from deck to deck across the entire harbour. But last week only three turquoise trawlers could be spotted – 60% of the town's remaining fleet.

The Icelandic cod wars of the 1970s, when Iceland extended its fishing zones and excluded UK trawlers from territory they had previously harvested, obliterated what had, in the 50s, been the world's biggest fishing port. Veteran skippers such as Hall, 57, have never forgiven or forgotten. Now the port has 15 vessels designed to maintain windfarms, three times the number of surviving trawlers. In 1970 there were around 400 based at the Humberside port.

Steve Norton, chief executive of the Grimsby Fish Merchants Association, said: "We hope that renewables will do for Grimsby what oil did for Aberdeen." However, that seems a touch on the optimistic side.

"Without the cod wars, we would still have a big, vibrant port," says Hall. "One that would be supplied by its own ships instead of Iceland's," he reflects sadly.

Now, though, 42 years after the trawlerman's first foray into the North Sea, Hall has another crisis on his mind and a different fish – mackerel. And once again Grimsby's fate lies in the hands of the Icelandics.

Iceland's decision to increase hugely its mackerel quotas has so incensed North Sea neighbours such as Scotland that the European Union is contemplating sanctions that could ban Icelandic fishing boats from landing any catch at EU ports. Scotland has upped the ante still further by demanding that Iceland be prohibited from joining the European Union until it agrees to target fewer fish. Iceland recently suspended talks on joining the EU that began after the banking sector collapse. Although its government has completed talks on 11 of the more than 30 "chapters" of laws that new members must go through to join the EU, fishing is not thought to be among them.

Ian Gatt, chief executive of the Scottish Pelagic Fishermen's Association Limited, said it was inconceivable that the island could be considered for membership while it pushed ahead with mackerel quotas significantly above the recommended limits. "Iceland cannot be taken into the community while this situation is unresolved," he said.

Last week the row ratcheted up a notch when the Marine Conservation Society (MCS), taking note of the rapacious Icelandic fleet's activities, decided to exclude mackerel from its list of sustainable fish that could be eaten with a clear conscience. Chef Hugh Fearnley-Whittingstall, who along with Jamie Oliver and Raymond Blanc has urged shoppers to eat mackerel as a sustainable alternative to cod, has described the plight of mackerel stocks as a "farce rapidly becoming a tragedy".

Iceland's fishermen, and their political leaders, vehemently disagree, arguing that the species can now be found in such vast numbers in its waters that it amounts to an "invasion" threatening to overwhelm its marine ecosystem. They suggest mackerel have merely moved home, migrating north from Scottish to Icelandic waters. Hall says the mackerel movements are part of a wider pattern, adding: "The seas are definitely getting warmer, we see fish moving north."

As Europe's mackerel wars begin in earnest, this time Grimsby is on the Icelanders' side. If sanctions are imposed, it is likely to be disastrous for Grimsby. Of the 18,000 tonnes of fresh fish sold there last year, almost 13,000 came from Iceland, mainly cod and haddock.

According to Hall, overall North Sea fish stocks are larger than he has ever known. During his last trip eight days ago he caught more than 500 boxes of large mature cod – each more than 30kg – in several days.

Chris Sparkes, managing director of Grimsby fish merchants Jaines & Son, said: "The MCS decision is very divisive, it's another negative story about fishing and ignores the fact that Icelanders have a fantastic reputation of sustainability and the EU does not."

Since Iceland's banking collapse of 2008 and its subsequent attempts to fish its way out of a crisis, Grimsby has boomed on the back of the surge of fresh white fish. Were the supply line to be cut, 70% of the UK's fish processing industry, along with Europe's biggest concentration of cold storage facilities, would be at risk.

Hall, skipper of the Jubilee Quest, and whose teenage years were spent fishing Icelandic waters, said: "We need imports from Iceland to keep the market going. Grimsby doesn't have ships any more. Without Iceland, the fish market would collapse."

Sparkes, whose firm employs 35 people and relies on 40% of fish from Iceland, said: "Icelandic fish are vital to our lifeblood. If we lose them it would be a community killer, a catastrophe for the area." At risk, too, are an estimated 4,000 jobs, each vital in a post-industrial economy that has struggled to recover from the cod wars.

One ward called East Marsh, close by the port – so large it takes 10 minutes to drive across – is the second most deprived in the country, according to the government's official analysis of more than 32,000 areas. Last week employment minister Mark Hoban singled out Grimsby as facing "clearly a challenge" after quarterly unemployment figures for the region revealed another rise.

So Iceland and its fishermen can currently do no wrong in Grimsby. More than 2,000 people are employed by Icelandic companies with investment worth hundreds of millions of pounds. Stephen Norton, chief executive of the Grimsby Fish Merchants Association, describes the "best developed seafood trading relationship in Europe, if not the world" between Grimsby and the Nordic state.

Martyn Boyers, chief executive of Grimsby Fish Market, claims nobody in British business "deals with Icelanders more than me".

Norton believes Iceland is correct to defend some of the best fishing grounds in the world. He even admits telling one Norwegian fisheries minister to resist joining the euro, warning: "You don't want to sacrifice your rich fishing grounds on the altar of currency."

According to Gatt, there is likely to be no resolution to the stalemate until October this year when the publication of fresh scientific data will provide up-to-date information on mackerel stocks.

He claimed the EU had effectively given up trying to coax a compromise from Iceland. "They [Iceland] are saying these woolly things about a science-based approach, but we don't really know what they are saying. They have not come back with anything. The EU official [leading negotiations] said he'd never seen anything like it. There is no dialogue."

If sanctions are eventually imposed, one high-profile casualty might be the traditional Grimsby smoked fish, eulogised by the likes of Rick Stein. Prepared inside century-old smokehouses, a hard-fought campaign recently saw the product awarded Protected Geographical Indication status. Less known, however, is that the smokies are recommended to be prepared with Icelandic haddock.

Grimsby, though, is unlikely to ever turn to smoking mackerel. "I can't remember the last time we sold a box of mackerel," said Boyers.

Instead the species for sale from 6.30am tomorrow at Grimsby fish market will typically be pelagic white fish, over which 150 merchants are currently sniffing gills, and checking skin firmness and brightness of eyes. Nine hours later, on the edge of the North Sea, their workers are still filleting Icelandic fish. The temperature has dipped below freezing, the work is wet and the cutters paid per "piece" or each fish filleted. The fastest earn up to £500 a week.

Merchant Gary Cadey, 58, who has worked at the port for 43 years, said: "That's a very decent wage around here." But Cadey – who was known as Grimsby's champion "dog skinner" for the dexterity with which he could fillet a dogfish – says that despite the long days it is a rewarding trade, albeit one in which a lie-in equals 6am. "It gets in your blood. We had one guy retired before Christmas after 50 years as a merchant. Last week he was back, he couldn't sleep."

Cadey is one of the directors of the port's new Seafood Village, a new complex of 22 companies, some Icelandic, that have just moved from the port's "Casbah" of decrepit red-brick Victorian buildings. The move is an impressive demonstration of optimism in Grimsby's future. Whether that optimism is well founded will depend on the consequences of the mackerel wars for a town that knows only too well what it means to fall out over fish.