Croatia secured a maximum point finish in Group D after Ivan Perisic's late goal earned them the victory.
Consequently, Iceland were eliminated from the competition having finished on only one point over the three games.
Despite Iceland's best efforts they simply did not make the most of their opportunities on goal and were therefore caught out at the back in the search of a winning goal.
Equation for Iceland to progress
Having thumped Argentina last week, Croatia had already sealed their place in the knockout stages.
However, Iceland still had everything to play for going into their final game in Group D.
For Iceland to progress, they needed to take all three points from Croatia and hope Argentina draw or even win - by the same goal margin.
Croatia open the scoring
It took Milan Badelj just eight minutes in the second half to put Croatia ahead through a perfectly hit half-volley.
Badelj hit it on the bounce to give Hannes Þór Halldórsson no chance of saving it. After striking the bar just seconds before,
Iceland were unable to react against the growing threat Croatia were proving.
The Icelandic goalkeeper who became a national hero after saving Lionel Messi's penalty in their opening game stood no hope of saving the shot after Badelj hit the volley into the ground.
A tough challenge for Iceland to advance to the knockout stages became a whole lot tougher with them needing a victory.
Iceland were granted a way back into the game after they were awarded a penalty for a handball against Liverpool's Dejan Lovren.
Gylfi Sigurðsson stepped up and made no mistake as his emphatic penalty sailed into the top corner - sending Lovre Kalinić the wrong way.
A stonewall penalty which was correctly given by the Spanish referee without the assistance of VAR.
The goal gave Iceland a glimmer of hope with Argentina drawing at the time it meant another goal would see the Icemen go through.
Perisic seals the deal
Ivan Perisic sealed Iceland's fate with a late goal to deny them any hope of progression to the knockout stages.
Iceland were the architects of their own downfall after being caught of overplaying the ball in the middle of the park.
Perisic was found on the edge of the box and fired the ball across the face of the goal to find the far corner and secure Croatia a nine-point group stage finish.
Steady first half
Iceland began the game with a steady tempo, almost reluctant to expose themselves at the back early on.
However, with Argentina taking an early lead thanks to Lionel Messi it was clear that Heimir Hallgrímsson's men would have to show some attacking threat.
Croatia showed the same quick and precise passing that they did in the 3-0 victory over Argentina forcing Iceland to camp in their own half.
It took until the half-hour mark for Iceland to create an attacking threat on Lovre Kalinić's goal.
The best chance of the half came five minutes before the interval for Iceland. A well-worked one-two between Alfreð Finnbogason and Gylfi Sigurðsson made space on the edge of the box but Finnbogason's shot curled narrowly wide of the target.
A golden opportunity for Iceland to open the scoring squandered to the disappointment of the travelling fans. The chance seemed to bring a new found confidence out of Iceland as the chances began to flow.
With just minutes left Cardiff City's Aron Gunnarsson forced a fine save out of Kalinić.
The midfielder's curled shot from the edge of the box was sailing into the far top corner but Kalinić denied Iceland of taking a half-time lead.
Action packed second period
After a much better start from Iceland, it was Croatia who nearly broke the deadlock in the opening minutes of the second-half.
Milan Badelj was in acres of space around 25-yards out and took the speculative shot on which almost paid off as it cannoned off the crossbar.
Just moments later, Badelj gave Croatia the advantage after rifling in a half-volley.
Within the first 10 minutes of the second period, we had seen more action than in the whole of the opening 45.
Just minutes after Badelj opened the scoring, Iceland came inches away from equalising after Sverrir Ingi Ingason's header was denied by the woodwork.
However, the stuffing was knocked out of Iceland after Perisic's late winner - eliminating them from the competition.