Iwobi gave the Premier League side the perfect start in this last 16, first leg at a raucous Roazhon Park, but the match hinged on the sending-off of Arsenal defender Sokratis Papastathopoulos four minutes before half-time.
Benjamin Bourigeaud equalised moments later, and the hosts’ second-half pressure paid off as a Nacho Monreal own goal put Rennes ahead before Ismaila Sarr’s late header gave them a two-goal cushion in the tie.
Unai Emery’s side must now turn the tie around in the second leg in London next Thursday if they are to progress any further in a competition which represents their only hope of silverware this season, and offers a potential route into next season’s Champions League.
“I think we can do better, 3-1 is hard for us,” said Emery.
“We are going to think for next week. We will start with 11 against 11, without Sokratis, without (Alexandre) Lacazette, but if we play like we did in the first 40 minutes, with our supporters also, we will have the possibility to come back.”
The Gunners recovered from a first-leg deficit to beat BATE Borisov in the last round, but Rennes are a step up in quality and are revelling in what is already their best ever European run.
Rennes had eliminated Real Betis in the last round and there was a superb atmosphere in a stadium packed to its capacity of almost 30,000.
Arsenal were missing French striker Lacazette, who is suspended for both legs of this tie after being sent off against BATE in Belarus.
Nevertheless, they took the lead inside four minutes when Iwobi’s cross-cum-shot curled low into the far corner.
Sokratis sent off
Rennes slowly grew into the game, though, with Hatem Ben Arfa — who was sidelined last season by Emery when both were at Paris Saint-Germain — increasingly influential on his 32nd birthday.
As half-time approached, Ben Arfa played in Sarr, who was hauled back by Sokratis just outside the area. The Greek defender had already been booked, so a second caution equalled a red card.
Bourigeaud struck the wall from the resulting free-kick, but the ball came back to him and he sent a stunning half-volley into the far corner.
Rennes had been unbeaten in all 12 previous home games since the appointment of Julien Stephan as coach in December, and they made the most of their man advantage in the second half.
Petr Cech, back facing one of his former clubs, made several interventions before being beaten again in the 65th minute, as Mehdi Zeffane’s cross from the right deflected off Monreal and looped in.
Their potentially crucial third goal arrived with two minutes left as James Lea-Siliki’s cross from the left was headed in by Senegal star Sarr at the far post.
Chelsea were in action later at home to Dynamo Kiev. In other earlier kick-offs, much-fancied Eintracht Frankfurt drew 0-0 at home to Inter Milan, for whom Marcelo Brozovic had a first-half penalty saved.
Sevilla won the Europa League three years in a row between 2014 and 2016 with Emery as coach, but on Thursday they twice threw away a lead to draw 2-2 at home to Slavia Prague.
Wissam Ben Yedder put Sevilla ahead inside a minute, with Munir El Haddadi getting their other goal.Their compatriots Villarreal, struggling badly in La Liga, won 3-1 away to 2008 UEFA Cup winners Zenit Saint Petersburg, while Dinamo Zagreb beat Benfica 1-0.