Despite being a goal down at half-time, captain Aron Gunnarsson, a regular with Cardiff City since 2011, was to inspire his team with a resilient second-half performance.
It was Swansea City’s Gylfi Sigurdsson, who was coached by Villas-Boas while at Tottenham, who almost gave the outsiders a dream start from their first attack but Sporting keeper Rui Patrício responded well.
The pace of Portugal’s front two, Ronaldo and Nani, was an obvious threat to an Iceland defence, that had conceded only six goals in qualifying.
Gradually Portugal took control but were denied on twenty-one minutes. Ronaldo gathered possession on the left and delivered an inch-perfect cross onto the head of Nani, who seemed certain to score only for his effort to cannon off the legs of Halldorsson and away to safety. Portugal pressed forward, Ronaldo sent a glancing header over and then failed to connect with Pepe’s long ball.
On the half-hour mark Portugal deservedly took the lead.
Pepe picked out André Gomes who flicked a lovely first time pass out to Vieirinha on the right touchline.
The impressive André Gomes took the return pass and crossed into the box where Nani, arriving unmarked, coolly steered the ball inside Halldorsson’s near post.
Portugal continued to dominate up to the interval, they completed 277 passes to Iceland’s 66 in the first forty-five minutes, but were punished five minutes after the break. Bjarnason drifted in behind Vieirinha to thunder home a volley from a Johann Gudmundsson cross to send the fans of the championship’s smallest nation wild with delight. Portugal continued to have the majority of possession as Iceland withdrew into a defensive formation.
There were five minutes remaining when former Manchester United team-mates Nani and Cristiano Ronaldo teamed up to break Icelandic hearts.
Nani crossed, Ronaldo prepared to make history as the first player to score in four consecutive European Championships but headed straight into the hands of Hannes Halldorsson.
The roar that emanated from those in blue behind the Iceland goal was a precursor to the celebrations that were to follow.
Even so there was still time for Iceland to nearly snatch victory as substitute Alfred Finnbogason sent in a rasping drive which Patricio parried over the bar. Cristiano Ronaldo may well have equalled Luis Figo’s 127 appearances for Portugal but this will be a game he will want to forget as he wasted two stoppage time free-kicks.
This is becoming a tournament in which teams of world-class individuals - Belgium, Austria and now Portugal - are being upstaged by teams full of spirit.
Iceland had nowhere near the talent of the Portuguese team but the spirit they showed was fantastic.
On Saturday Portugal must lift themselves for the crucial game against Austria in Paris.