The morphology of ultrathin epitaxial MgO layers reactively grown on Ag(001) was investigated by using scanning tunnelling microscopy. In the initial deposition stage Ag atoms are partially removed from the substrate and form extended monoatomic islands leaving vacancy islands in the substrate itself. On individual substrate terraces Ag is thereafter found at three atomic levels. For submonolayer deposition MgO condensates in form of small islands of monoatomic height, located on the original substrate, on the protruding Ag islands and on the vacancy islands as well. The largest Ag(001) fractional coverage by monoatomic MgO islands is 70%. A limited amount of MgO bilayers or trilayers has also been detected (about 1% fractional coverage). At the nominal deposition of 1 ML flat, squared and connected MgO domains of about 10 nm in width form, with edges along the [110] directions. The actual substrate fractional coverage is about 85% and the occurrence of bilayers and multilayers becomes significant (about 30 and 5% fractional coverage, respectively), resulting in the formation of three-dimensional pyramidal MgO islands.