The Iron dropped back into the bottom four after the loss at Glanford Park. They lead at half-time, thanks to Karl Hawley's early strike, but conceded three second-half goals.
"I thought we were excellent in the first half, but the second half was worrying," said Knill
"We can't seem to keep the ball out of the back of our net at the moment and when that is happening it is always going to be difficult.
"Credit to Tranmere, they played better in the second half but we conceded two poor goals from set-pieces when players did not do the jobs we ask them to do.
"We thought we were making progress, but this result is a setback. It's frustrating, but all we can do is work harder to turn things round."
Ronnie Moore, the Tranmere boss, revealed he got stuck into his players at half-time.
"I was not happy - and the players knew it. I had a few 'quiet' words and I was delighted with the response. If we were going to lose, I did not want us to do it waving the white flag, I wanted us to battle.
"Once we were back on level terms, there was only one team going to win it and that was us.
"I thought we steam-rollered them in the second half and was delighted with our spirit."