However, it should not detract from Iceland's achievement after they proved incredibly resilient and outsmarted their opponents to take up their place against hosts France in the quarter-finals.
England had taken the lead in just the fourth minute when Raheem Sterling was brought down in the penalty area, allowing Wayne Rooney to score from the spot.
However, just 34 seconds after the kick-off Iceland equalised through Ragnar Sigurdsson, who lashed a flick-on from an Aron Gunnarsson long throw in at the back post.
It went from bad to worse for England when Kolbeinn Sigthorsson scored with Iceland’s second attack of the match after some neat interplay on the edge of the area. His shot squirmed under the arm of Joe Hart.
For much of the second half England were uninspired and, despite huffing and puffing and the late introduction of the lively Marcus Rashford, could not find a way through.
TALKING POINT: Is this England's worst ever tournament result?
As the final whistle blew, the reactions of several England players laid bare the enormity of this defeat. Gary Cahill and Dele Alli collapsed to the floor, burying their heads in the Stade de Nice turf, while Jack Wilshere sat on his haunches, his face contorted into an anguished grimace. Is the greatest moment of Iceland's football history the darkest chapter of England's?
People will find their own answers during the lengthy and tortuous inquest to come. It's certainly one that consigns Roy Hodgson to the list of England's most infamously hapless managers. Privately he might point out that both of Iceland's goals came from individual mistakes on the part of England players, but there can be no mitigating his wider record: despite cruising through qualifying, England have won only three of their 11 tournament matches during his tenure. There were no surprises when he opened his post-match press conference by announcing his resignation.
England's Jack Wilshere looks dejected after the game
Image credit: Reuters
Having shown little attacking imagination or ruthlessness for all their enthusiasm in the group stage, England's brittle confidence shattered the moment Kolbeinn Sigthorsson's low shot squirmed under the palm of Joe Hart, who again underperformed. Wayne Rooney's touch deserted him as they laboured after the break, failing to seriously trouble a well-drilled Icelandic defence. Marcus Rashford's fearlessness and energy threatened to turn the tide in the final moments, but English football's brightest young talent over the past six months was afforded just five minutes to try and save the day from the bench.
In the end, Iceland fully deserved their win and, most damningly of all, were fairly comfortable winners. Their fairytale will continue on to Stade de France on Sunday, and what is sure to be another memorable encounter with hosts France. But it's unlikely that England's players will be able to bring themselves to watch it; the minds of many will still be buried in the Stade de Nice turf.
MAN OF THE MATCH: Ragnar Sigurdsson (Iceland)
Not the Sigurdsson that most England supporters feared heading into this match, he turned the tide by cancelling out Wayne Rooney's early penalty when he converted Kari Arnason's flick-on from a monster Aron Gunnarsson throw 34 seconds after the restart. He also led the way superbly thereafter as Iceland forged ahead before defending their lead nervelessly.
Iceland's defender Ragnar Sigurdsson shoots a goal past England's goalkeeper Joe Hart during Euro 2016 round of 16 football match between England and Iceland
Iceland: Halldorsson 7; Saevarsson 7, Arnason 8, R. Sigurdsson 9, Skulason 7; Gudmundsson 7, G. Sigurdsson 7, Gunnarsson 8, B. Bjarnason 7; Bodvarsson 7, Sigthorsson 8. Subs: E. Bjarnason 7, Traustason 7.
4' - PENALTY TO ENGLAND! Sturridge's searching diagonal pass sends Sterling racing through and he beats Halldorsson to the ball before being felled by the Iceland goalkeeper. Referee Damir Skormina points to the spot and Rooney steps up...
4' - GOAL! England 1-0 Iceland. Halldorsson goes the right way but Rooney's firmly struck penalty nestles in his bottom right corner. Dream start for England.
GOAL! England 1-1 Iceland. What a response! Just 34 seconds after play resumes, Arnason flicks on an Iceland long throw and Ragnar Sigurdsson lashes the ball in at the back post. No chance for Hart and England's early momentum is checked.
Iceland's Kolbeinn Sigthorsson celebrates after scoring their second goal
Image credit: Reuters
12' - CHANCE! Gylfi Sigurdsson concedes a corner and Rooney's fierce delivery is inches away from connecting with an unmarked Smalling. No lack of opportunities in these opening minutes.
14' - CHANCE! Every England corner seems to be a cue for panic in the Iceland penalty area at the moment, and after Rooney's latest cross is parried straight up in the air, it is only half-cleared to the feet of Alli, whose fierce shot rifles just over Halldorsson's crossbar.
18' - GOAL! England 1-2 Iceland. It's only Iceland's second attack of the match but they lead. Neat one-touch football on the edge of the penalty area allows Sigthorsson to work a yard of space, and his low shot squirms under the despairing hand of Hart. Remarkable turnaround and start to this game.
28' - CHANCE! Great move by England. Sturridge races onto an Alli pass into the right channel and just manages to keep it in play before clipping it to the back post for Kane, whose spectacular volley is tipped over by Halldorsson.
55' - CHANCE! Iceland's set pieces are causing England all sorts of problems and Ragnar Sigurdsson should probably be celebrating his second goal, after a hanging corner is headed back and forth across the England box and the centre back unleashes a spectacular bicycle kick that hits Hart and flies clear.
England's Joe Hart in action
Image credit: Reuters
73' - CHANCE! Iceland launch their first proper counter attack of the second half and Saevarsson cuts inside from the right before ripping a fierce shot just over Hart's crossbar.
83' - CHANCE! Iceland could be out of sight. One simple pass cuts through England's high defence and Gunnarsson ties Wilshere in knots before stinging Hart's palms with a fierce shot from the angle. England survive the resulting corner.
90+3' - FULL-TIME: England 1-2 Iceland. Two headed chances at the death for Jamie Vardy and Dele Alli go astray and it's all over! The greatest moment in the history of Icelandic football. Is it the darkest moment of England's? Several of the players collapsed on the Stade de Nice turf certainly seem to think so, and Roy Hodgson will not be relishing the prospect of his post-match media responsibilities. Iceland took their chances ruthlessly in the first half and defended stoically in the second, when England appeared to lose all energy and confidence. The smallest country ever to qualify for this tournament are in the quarter-finals, and will face France at Stade de France on Sunday. Astonishing.
England are now without a win in their last four knockout matches at the EUROs. Their last victory, after a draw and penalties, was against Spain in the EURO 1996 quarter-finals.
Iceland have won a knockout tie for the first time ever. In November 2013, they lost 2-0 on aggregate against Croatia in the World Cup qualification play-offs.
England conceded five shots on goal during the match - equalling the five shots on goal they have conceded in the group stage from Wales (2), Russia (2) and Slovakia (1) combined.