Although the soccer pedigrees of the two countries could not be more different, Iceland looked the better team in just about every aspect of the game and fully deserved to extend their dream run on their first tournament appearance.
After falling behind to a fourth-minute Wayne Rooney penalty they levelled almost immediately through Ragnar Sigurdsson and struck again in the 18th with a shot by Kolbeinn Sigthorsson.
A ponderous England never looked remotely capable of finding a way back into the game and even at the end when they were reduced to launching long balls into the box, Iceland dealt with everything comfortably.
“It feels fantastic to come here as an underdog and perform in this way," said Iceland joint-coach Lars Lagerback, who also claimed two wins and four draws against England in his days as Sweden manager.
Pundits were quick to rank England's defeat alongside that against the amateurs of the United States in the 1950 World Cup but such a judgement conveniently overlooks the progress the Icelanders have made in recent seasons, not least in beating the Netherlands home and away to get to France in the first place.
It also fails to take into account England's miserable European Championship record, where they have won only one knockout match, on penalties at home to Spain in 1996.
Hodgson, who steered the team to 10 straight wins in qualifying, duly became the latest in a long line of England managers to fall on his sword after a failure to get to the business end when it really matters.
"Now is the time for someone else to oversee the progress of a hungry and extremely talented group of players," Hodgson said, reading a prepared statement.
"They have done fantastically, and done everything asked of them," he added in a bizarre account of yet another failure to perform at a major tournament.
Hodgson, 68, then refused to take further questions
It all looked so different for England at the start when Raheem Sterling was hauled down by keeper Hannes Halldorsson, allowing Rooney to smash them ahead from the penalty spot on his 115th appearance, matching David Beckham's outfield record.
The lead lasted less than two minutes, though, as Iceland, scored via an Aron Gunnarsson long throw, just as they had predicted. It was flicked on by Kari Arnason to an unmarked Ragnar Sigurdsson to sweep home.
If England's defending was bad for that goal it was disastrous for the second as Iceland were allowed time and space on the edge of the box to set up Sigthorsson for a low shot that Joe Hart should have saved but merely took the power off as it rolled over the line.
England looked shell-shocked and spent the rest of the half struggling to make any inroads, their front men and attacking midfielders static, and were booed off by their own fans.
England threw on midfielder Jack Wilshere for the second half and then striker Jamie Vardy but the team's passing was awful and their movement sluggish.
Harry Kane, the Premier League's leading scorer last season, summed up the poor quality on show when he took three free kicks and launched each one high into the stands without a team mate even close to connecting with the ball.
The final whistle produced extraordinary scenes as the entire Iceland squad and coaches sprinted to the corner of the pitch to celebrate ecstatically with their fans.
They can now look forward to facing France with the prize for the winner being a semi-final against Germany or Italy.
"Everyone started to run towards the fans so I did that too and then I flipped out completely," said Ragnar Sigurdsson.
"This is the biggest thing everyone in the squad has experienced. I don’t know how big it is, but it’s damn big."
In contrast England's players sank to the turf in despair, with a deluge of jeers, boos and whistles raining down from the fans all around them, finally being encouraged to leave the pitch to a chant of "You're not fit to wear the shirt."
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