A late Adam Hammill goal forced Sunderland to settle for their fourth draw in five league games.
The Black Cats were minutes away from a vital three points after Josh Maja's fine finish early in the second half, but a stunning strike from the new Scunthorpe signing leveled the scores.
Jack Ross and his side are now three points off the automatic spots, though they still have a game in hand on Portsmouth and Luton Town.
Sunderland started brightly and came close to testing Jak Alnwick when a good press from Chris Maguire won the ball back for the Black Cats.
He found Josh Maja, who took one touch before playing a clever ball across the box, Funso Ojo doing well to clear as Max Power prepared to shoot.
Scunthorpe have improved markedly from when the two sides met early in the season, and their direct style did cause problems from the visitors.
Lee Novak wasted a good chance when a cross fell to him at the back post, his effort weak and straight at Jon McLaughlin.
McLaughlin did superbly to deny George Thomas soon after, the lively forward racing onto a loose ball and shooting towards the bottom corner.
The Scot's outstretched boot kept the scores level and from the following corner, James Perch missed a free header from a matter of yards.
Sunderland's attacking play was poor and it took 34 minutes for them to register their first shot.
A delightful turn from Josh Maja opened up the pitch, but Maguire sliced his pass well over the bar.
A similarly sluggish start to the second half saw Jack Ross act quickly, Charlie Wyke replacing Maguire.
Aiden McGeady forced the first save from Alnwick soon after as he cut inside and curled an effort towards the bottom corner.
Sunderland were seeing more of the ball in dangerous areas and on the hour mark they took the lead.
Maja received the ball on the edge of the area from McGeady and played a clever ball out to the byline. Reece James did superbly, racing onto the ball and firing a wicked cross to the front post. Maja got in front of his marker in trademark fashion and nodded home.
The Black Cats settled significantly but with just under quarter of an hour to go they were handed an extraordinary let off.
Cameron Borthwick-Jackson was left free at the back post as a free kick was floated over, but the Manchester United loanee couldn't make a clean connection and it was an easy save for McLaughlin.
Substitute Duncan Watmore then had a chance to kill the game as he ran free towards goal, but a heavy touch allowed the Scunthorpe defence to recover and clear.
A tense game continued to swing from end to end, McLaughlin doing well to recover when an effort from Perch was deflected towards goal.
Wyke then sent a powerful header just over the bar from a Sunderland corner.
An inability to kill teams off has cost Sunderland in recent weeks and so it was again here.
It took a sensational strike to beat McLaughlin. Adam Hammill, making his debut from the bench, curled a stunning effort into the far corner from the edge of the area.
Scunthorpe United XI: Alnwick; McMahon, McArdle, Burgess, Borthwick-Jackson; Ojo (Hammill, 74), Perch, Sutton (van Veen 74), Wootton; Novak, Thomas (Lund, 85)
Subs: Flatt, Webster, Lewis, McGahey
Sunderland: McLaughlin; O'Nien, Flanagan, Dunne, James; Cattermole, Power; Gooch, Maguire (Wyke, 53), McGeady; Maja (Watmore, 72)
Subs: Ruiter, Matthews, Oviedo, McGeouch, Baldwin