Guus Hiddink’s men could not break down their European opponent’s defence as they suffered their third defeat in four matches, much to the dismay of their Bayern Munich speedster.
"We must not think we are good because we're not good,” he told NOS. “We can be good, but we're not good.
"We're still not among the top countries in the world and we must fight hard for good results. It wasn't good enough. Euro 2016 is two years away and we want to be there. But a lot must happen."
Former Dutch great Ronald de Boer, who represented the Netherlands at two World Cups and two European Championships, harshly criticised new coach Guus Hiddink for the Dutch performances of late, believing Ronald Koeman to be a better replacement for the aging Hiddink.
“I think Guus Hiddink doesn't really have a game plan in my eyes," de Boer said as a pundit on Sky Sports.
"He doesn't show the guys 'this is the way we want to go'. I want to see, for example, running midfielders supporting Van Persie. I don't see any of this.
"There's plenty of games to play and change it around. But the pressure will be enormous now for Guus because there was criticism for his nomination beforehand.
"Koeman was ready to take over, he was really outspoken, he really wanted to take the job. With all due respect for Hiddink, he's 67 years old, I think he's done, in my eyes.”
However, Oranje captain Robin van Persie defended his coach, but admitted his side were not good enough on the day.
"That's not fair to Guus Hiddink and his staff," the Manchester United striker said.
"He's a fantastic coach. We worked hard to get here in as good shape as possible. Iceland were looking for our mistakes.
"We made too many errors in possession and weren't strong enough in duels.
"I still have hope. Nothing is decided yet, but there's a lot of work to do. We'll do anything. We don't give up.”
The Netherlands sit third in their Group A Euro 2016 qualifying group, six points adrift of both Iceland and the Czech Republic.