Valentina Bergamaschi's second-half equaliser kept Italian hopes of reaching the last eight alive after Karólína Lea Vilhjálmsdóttir's early strike for Iceland.
Article top media content
Valentina Bergamaschi capped an impressive Italian showing after the interval, but the Azzurre were unable to make their dominance count to secure all three Group D points against Iceland at the Manchester City Academy Stadium.
3' Vilhjálmsdóttir powers Iceland ahead
7' Gunnarsdóttir hits effort into side netting
26' Piemonte fires wide
61' Jóhannsdóttir prods just past post
62' Bergamaschi steers in equaliser
73' Sigurdardóttir palms Bonansea shot onto post
Match in brief: Italy rescue point
Azzurre coach Milena Bertolini made five alterations hoping for a reaction following their emphatic Matchday 1 loss to France, but it was Iceland who started strongest, taking the lead after just three minutes.
Sveindís Jane Jónsdóttir's long throw into the area was not dealt with by the Italy defence and Karólína Lea Vilhjálmsdóttir was quickest to react, sending a half-volley into the roof of the net.
Four minutes later the Italian back line failed to clear another Icelandic set piece and Iceland captain Sara Bjork Gunnarsdóttir almost doubled the lead with a powerful strike into the side netting.
Italy were reduced to half-chances from the edge of the box before Arianna Caruso did manage to test Sandra Sigurdardóttir with 20 minutes gone. The Azzurre's best opportunity came in the 26th minute, when Martina Piemonte was picked out in space near the penalty spot by Flaminia Simonetti's cross from the right, but could only drag her effort wide.
With a defeat meaning Italy would have been out of quarter-final contention, Bertolini made two attacking changes early in the second half in search of an equaliser. However, it was Iceland who came closest to a second on the hour, substitute Alexandra Jóhannsdóttir poking wide following a free-kick.
Just under a minute later, Italy were level. Barbara Bonansea, on at half-time, exploited space down the left before her clever cut-back was guided into the net by Valentina Bergamaschi.
By now Italy were in the ascendancy and looking for a winner, peppering the Iceland goal. Icelandic keeper Sandra Sigurdardóttir was called into action on a number of occasions, most notably turning Bonansea's low strike onto the post.
Iceland chances were few and far between after their early flurry although they could have snatched victory with just minutes remaining only for Vilhjálmsdóttir to scuff her close-range shot the wrong side of the upright.
Player of the Match: Barbara Bonansea (Italy)
"She provided an assist and showed her creativity by finding pockets of space in front of Iceland's back line when she came in from the flank."
UEFA Technical Observer panel
Vieri Capretta, Italy reporter
The reaction Italy needed. Apart from the first few minutes, Italy were the better side and could have won this. The Azzurre created plenty of chances, especially in the second half, when Bertolini used her substitutes very well. The coach had said that all her players would be important and she proved that. Now it's all to play for in the final match to secure a spot in the next round.
Andri Valsson, Iceland reporter
Iceland could hardly have wished for a better start but it took up a lot of energy to defend for so long. The team lacked the same physical strength they brought into the match against Belgium and had trouble linking passes in midfield, meaning they were unableto take advantage of their fast breaks, with Jónsdóttir's pace held in check for long periods. They deserve credit for their defensive spirit, but that doesn't bring the three points.
Milena Bertolini, Italy coach: "We knew we would have to secure progression in the last match, so it's nothing new. Every player is important in this tournament, we saw that today. Conceding so early could have killed the confidence of the players but they did well to react."
Valentina Bergamaschi, Italy goalscorer: "I scored one of my classic goals, coming in from deep to get on the end of a low cross."
Thorsteinn Halldórsson, Iceland coach: "There was a part of the game where we were struggling. But we worked it out, were powerful in the final ten minutes and tried to score. We could have had two more goals and we created some very good chances. But football is also about luck and it wasn’t with us today."
Sara Björk Gunnarsdóttir, Iceland captain: "We knew Italy are a very good team. I think it was quite even; at some points Italy took control and then we also did, especially when we scored early. That gave us a lot of confidence. But we had a tendency to drop too deep at some stages. We need to be a little bit more brave with the ball and keep it better."
- Vilhjálmsdóttir's goal after just two minutes and 36 seconds was Iceland's fastest ever at a Women's EURO.
- Vilhjálmsdóttir also became the youngest Iceland scorer at the tournament, aged 20 years and 340 days.
- In their 12th match at the tournament, Iceland have scored in successive Women's EURO games for the first time.
- Italy have scored in each of their last seven Women's EURO group stage matches.
- The Azzurre ended a run of seven successive defeats when conceding first in a UEFA Women's EURO match.
Italy: Giuliani; Di Guglielmo, Gama (Bartoli 58), Linari, Boattin; Bergamaschi, Simonetti, Rosucci, Caruso (Bonansea 46); Piemonte (Girelli 52), Giacinti (Sabatino 85)
Iceland: S Sigurdardóttir; E Vidarsdottir, Viggósdóttir, Gudr. Arnardottir, Gísladóttir (Gunnlaugsdóttir 88); G Jónsdóttir (Jóhannsdóttir 57), Brynjarsdóttir, Gunnarsdóttir (Gudmundsdóttir 77); S Jónsdóttir, Thorvaldsdóttir (Albertsdottir 58), Vilhjálmsdóttir (Magnúsdóttir 88)
Group D concludes on Monday with 21:00 CET kick-offs for Iceland's meeting with France in Rotherham and Italy's encounter with Belgium at the Manchester City Academy Stadium.