The visitors took the lead courtesy Antonio Valencia in the fourth minute and Jese Lingard doubled the Red Devils' advantage seven minutes later.
Alexandre Lacazette pulled a goal back for the Gunners after the interval but Lingard scored his second of the game to end Arsene Wenger’s side 12-match winning run at the Emirates Stadium.
And the Nigeria international who replaced an injured Shkodran Mustafi in the 15th minute expressed his disappointment at the manner of the loss.
“I’m very frustrated. You could see the passion and the aggression we played with today but unfortunately it wasn’t to be and we just need to credit Manchester United,” Iwobi told club website.
“We were pushing to get the equaliser, had a few chances, but credit to their keeper, he made a few good saves.
“We didn’t take our chances and they capitalised on that and made it three, which basically killed the game.”
Iwobi has scored only once in eight appearances for Arsenal in the Premier League this season.
And this was the Gunners' fifth loss of the campaign which sees them drop to fifth in the standings.
However, the 21-year-old will look to help the Gunners bounce back from the loss when they welcome Bate Borisov to the Emirates Stadium in Thursday’s Uefa Europa League clash.