The striker, who had been relegated to the bench for the third successive game, pounced for his 22nd goal of the season with only four minutes remaining to complete a tremendous turnaround in a crucial promotion clash.
Mackail-Smith - introduced as part of a double substitution at half-time - reacted sharply to fire past Scunthorpe keeper Joe Murphy after a Charlie Lee shot had been saved.
It all followed a fine delivery from another interval arrival, Tom Williams, but was a cruel blow to a classy visiting side who dropped out of the play-off zone as a result of this setback.
Victory for Posh had looked most unlikely after a first period in which slick Scunthorpe had dominated.
The dangerous Gary Hooper twice arrowed efforts into the side netting before forcing a fine stop from Joe Lewis.
But even the home keeper was powerless to stop the Iron from going in front six minutes before the break when on-loan Arsenal youngster Henri Lansbury swept in a Hooper cut-back.
But it was a different contest after the break after Posh boss Darren Ferguson's reshuffle and the unfortunate departure of Hooper due to injury.
The visitors' threat was greatly reduced after the exit of their prolific player but Posh looked increasingly dangerous following the introductions of Mackail-Smith and Williams.
The latter player was also the supply line for Posh's leveller in the 63rd minute when wideman Chris Whelpdale converted his sixth goal of the season.
Lee then saw a header bounce against the bar before Aaron Mclean rifled a half-volley straight at Murphy.
Paul Hayes' celebrations at a second Scunthorpe 'goal' were cut short when the effort was scrubbed for offside, but Mackail-Smith made no mistake at the other end to settle a London Road thriller.