Rooney, 30, joins David Beckham as England's most-capped outfield player, 10 appearances shy of goalkeeper Peter Shilton's overall record.
The Manchester United midfielder returned alongside Kyle Walker, Danny Rose, Dele Alli, Harry Kane and Raheem Sterling, all of whom had dropped out of the team for the 0-0 draw with Slovakia.
Nathaniel Clyne, Ryan Bertrand, Jordan Henderson, Jack Wilshere, Adam Lallana and Jamie Vardy made way.
Iceland's joint coaches Lars Lagerback and Heimir Hallgrimsson kept faith with the same starting XI for the fourth game running at the tournament.
Their team features three players -- Swansea City playmaker Gylfi Sigurdsson, Cardiff City midfielder Aron Gunnarsson, the captain, and Charlton Athletic's Johann Gudmundsson -- who play in the English leagues.
The winners will play tournament hosts France in the quarter-finals at Stade de France on Sunday.
England last reached a major tournament quarter-final at Euro 2012, when they lost on penalties to Italy, while Iceland are appearing at their first major competition.
Starting line-ups in the Euro 2016 last 16 match between England and Iceland at Stade de Nice on Monday (1900 GMT kick-off):
Joe Hart; Kyle Walker, Gary Cahill, Chris Smalling, Danny Rose; Dele Alli, Eric Dier, Wayne Rooney (capt); Daniel Sturridge, Harry Kane, Raheem Sterling
Coach: Roy Hodgson (ENG)
Hannes Halldorsson; Birkir Saevarsson, Ragnar Sigurdsson, Kari Arnason, Ari Skulason; Johann Gudmundsson, Aron Gunnarsson (capt), Gylfi Sigurdsson, Birkir Bjarnason; Jon Dadi Bodvarsson, Kolbeinn Sigthorsson
Coaches: Lars Lagerback (SWE) and Heimir Hallgrimsson (ISL)
Referee: Damir Skomina (SLO)