Gareth Southgate's side were reduced to ten men after Kyle Walker was sent off with 20 minutes remaining but finally earned a breakthrough when Sterling's shot hit Sverrir Ingason's arm and the Manchester City winger converted from the spot after the defender had joined Walker in earning a second yellow card.
The visitors survived a late scare when Iceland were almost immediately awarded a penalty of their own for Joe Gomez's clumsy shove on Albert Gudmundsson but Birkir Bjarnason skied his spot-kick to deny the hosts a famous point.
Here are four talking points from the match.
England deserved winners but performance disjointed
No-one could begrudge England a dramatic late victory in Reykjavik after they dominated possession and chances, and were unfortunate not to have taken the lead inside five minutes.
Before the match Gareth Southgate claimed England did not show enough patience in their infamous Euro 2016 defeat to Iceland and his new-look side displayed their newfound resolve and maturity by finally breaking the islanders' resistance with seconds remaining.
It felt like another example of how far England have come since that embarrassing night in France.
But for all Southgate’s pre-match optimism over the smoothness of England’s training camp, it was little surprise that his side produced a largely disjointed performance after the most disrupted build-up imaginable.
After a string of withdrawals, including Harry Maguire, Southgate’s squad arrived at St. George’s Park last week in varying degrees of fitness, with many having recently emerged from quarantine or their overseas holidays.
The England manager named just three survivors from their last international 10 months ago: Declan Rice, Raheem Sterling and Harry Kane, all of whom were playing for the first time this pre-season.
After an initial burst, in which Kane was unfortunate to have a goal wrongly ruled out for offside, England were kept at bay by a disciplined Iceland side, who defended deep and left little room for Sterling and Jadon Sancho to get in behind.
Rice showed his rustiness by scuffing a great opportunity from six yards, while Kane, who was constantly shackled by at least one Icelander, began to tire around the hour.
At times, the match had the feel of a preseason friendly and for many of England’s players it was.
Ultimately, the contest was a poor advert for Uefa’s decision to plough ahead with the Nations League in the circumstances and a worrying portents for a manic season ahead.
With more familiar faces and fitness, England should improve for the triple-header next month but you wonder how many disjointed matches there will be during this jammed-packed campaign.
Penalty call costs England
That said, it would have been a very different story had Kane’s fifth-minute goal counted. The England captain extended himself at the back post to meet Sterling’s cross, with replays showing he was comfortably onside.
The decision robbed Kane of the honour of becoming the first post-War Englishman to score in seven consecutive internationals and robbed the visitors of the chance to play out a very different match.
An early goal would have forced Iceland to be more adventurous and the likes of Phil Foden, Sancho and Sterling would surely have relished the additional space of a more open game.
Nightmare return for Walker
Walker marked his first England appearance since June 2019 with a red card in a nightmare return to international football for the right-back.
The Man City defender lunged on Arnor Ingvi Traustason with 20 minutes remaining to earn a second yellow card, and it was difficult to argue with the decision.
The 30-year-old will be suspended for Tuesday’s trip to Denmark, denying him a chance to win a 50th cap. It is hardly a major problem for England who have four other players in the squad who can fill-in, including usual first choice Trent Alexander-Arnold.
But for Walker, it was a poor impression to make on his return and given the sheer strength of the competition in his position, the red card could prove a very costly mistake.
Foden and Greenwood the future
The biggest positives from an unspectacular night were the debuts for Foden and late substitute Mason Greenwood. Barring unforeseen circumstances, it feels inevitable that both players will be a significant feature for the national team in the years ahead.
Playing in a midfield three, Foden was tidy and showed the occasional flash of brilliance, including a stunning raking pass to release Sancho in the first half.
Greenwood had limited time to show what he could do after replacing Kane and the Manchester United teenager could perhaps feel aggrieved that he was not introduced earlier as the England captain tired.
This game is unlikely to be long remembered for England but it could yet go down in history as the first caps for two stars of the future.