Random House Unabridged (used by Dictionary.com) does allow "isba" as an alternative spelling but uses "izba" as its main entry, which makes sense, since the modern Russian word is spelled изба with a "з", which is invariably transliterated as "z".
I would normally spell this izba. I'm curious about where you found it spelled like this, Sionnach.
In Slovene (and I suspect also in CBS Croato-Bosno-Serbian), izba is not only a small room, but a small room with a stove; the stove is what makes it an izba, i.e., it's a place where people live, not a storage room. In his Slovene Etymological Dictionary, Marko Snoj gives this word's origin as, puportedly, Vulgar Latin *extufa (from the verb extufare, "to heat by steam"), a word which also led eventually to the French étuve ("oven; steamroom") and the German Stube (a heated room).