Goals from David Mirfin and Ramon Nunez sealed the win, hauling the Iron to within three points of the home side at the foot of the table.
“It’s a massive win. It was billed as a must-win game and it really was," said Knill.
“If they had gone nine points in front it would have been difficult with four games left. We’ve cut it to three and it gives us a belief that we can still do it.
“We are always on at the them that they are better than they have shown. From start to finish it was a really good performance by the team.”
The Palace boss Dougie Freedman conceded nerves got the better of his side.
“It was a really bad day at the office. We’ve been on a great run at home but it’s come to an end just when we didn’t want it to," he said.
“We were maybe a bit tense and Scunthorpe were two or three yards sharper than our players. I’ve no complaints about losing the match.
“But we will take our medicine and move on. What I have to ask now is how will we respond?”