The race, which was postponed from Saturday after terrible weather conditions, was further delayed by fog and had to be reduced to just four laps, but it developed into a classic, with Rutter, searching for maiden glory on the island, setting the early pace and pulling clear on his powerful 750cc Honda RC45.
But Simpson, despite losing precious seconds in a problematic pit-stop to change tyres, soon caught second-placed Simon Beck, on a Kawasaki, and then pursued Rutter.
The 25-year-old Brierley Hill rider was 10 seconds ahead as the pair charged through Glen Helen on the final lap, but misfortune was to strike.
Rutter said: "Like last year, a contact lens came out as I was going into Ramsey and I had to slow down. But no complaints - Ian rode superbly in a brilliant battle and deserved the win."
Simpson really upped the power going over Snaefell on the final lap, covering the 37.73 mile course in a scorching 18minutes 21.7seconds - an average speed of 123.28mph - and that despite damp patches around the tortuous course.
"I really went for it over the mountain but nearly lost it at Windy Corner," said Simpson as he celebrated his second victory on the island.
"It was a great race; the bike was brilliant, but it was tricky in places. I took time to build my confidence and then gave it everything. Winning is great."
James Courtney completed a Honda 1-2-3 ahead of Beck, with Jason Griffiths fifth and David Morris sixth.Reuse content