The tower - based on Videy Island, just off the country's capital, Reykjavik - is lit up every year from October 9, the anniversary of The Beatles singers' birth in 1940, to December 8, the day he was assassinated in New York in 1980.
The singer's widow was accompanied by their son, Sean - who coincidentally shares his father's birth date - and around 850 locals, who joined with them to sing John's song 'Imagine' as the beacon was turned on.
As the tower lit up, it sent a huge beam of light 4,000 metres into the air and projected the words "Imagine Peace".
In a statement, Yoko said: "I hope the Imagine Peace Tower will give light to the strong wishes of World Peace from all corners of the planet and give encouragement, inspiration and a sense of solidarity in a world now filled with fear and confusion."
"Let us come together to realise a peaceful world."
The tower has been lit every year since 2007. When asked why she had chosen Iceland as the location for the tower, she said she felt it has a "purity" many other countries have lost.
She also said: "I am so happy friends and family have joined me here to celebrate John's life. October ninth is also the birthday of my son Sean so today is a day of very deep emotions for me. On this day I urge everyone in the world to imagine peace for our planet."