BACKGROUND: The increasing need for long-term care as well as diminished financial resources may compromise the quality of care of older people. Thus the need for clinically based quality of care monitoring to guide development of long-term services has been pointed out. OBJECTIVES: The aim of this study was to investigate trends in quality of care during 2003-2009 as reflected in the Minimum Data Set quality indicator outcome in Icelandic nursing homes and to investigate the association of Minimum Data Set quality indicators with residents' health status (health stability, pain, depression and cognitive performance) and functional profile (activities of daily living and social engagement). DESIGN: Retrospective analysis of nursing home data over 7 years. METHODS: The sample used for analysis was 11,034 Minimum Data Set assessments of 3694 residents living in Icelandic nursing homes in 2003-2009. Minimum Data Set quality indicators were used to measure quality of care. The chi-square test for trend and multivariate logistic regression were used to analyse the data. RESULTS: The mean age of residents during the period of the study ranged from 82.3 (SD 9.1) to 85.1 (SD 8.3) and women accounted for from 65.2% to 67.8%. Findings for 16 out of 20 quality indicators indicated a decline in quality of care (p<0.05), although in 12 out of 20 indicators the prevalence was lower than 25%. One quality indicator showed improvement, i.e. for "Bladder and bowel incontinence without a toileting plan" from 17.4% in 2003 decreasing to 11.5% in 2009 (p<0.001). Residents' health and functional status partially explain the increased prevalence of the quality indicators over time. CONCLUSION: Further developments in quality of care in Icelandic nursing homes need to be monitored as well as the association between residents' health and functional status and the Minimum Data Set quality indicator outcome. The areas of care where the Minimum Data Set quality indicators showed need for improvement included treatment of depression, number of medications, resident activity level and behavioural symptoms.