The 19-year-old Nigerian striker got on the scoresheet and set up two other goals as City cruised through to the quarter-finals with a 5-1 win at the Etihad Stadium.
It was an impressive way for the youngster to mark his first start for the club and it offered City some encouragement at a time of limited attacking options with leading scorer Sergio Aguero still out injured.
Pellegrini said: "It was very important for Kelechi to demonstrate once again that he's a very good player.
"He's not just a striker - he provided two assists
I'm very happy for him
He has things to improve but he's working in the correct way."
Iheanacho played up front with Wilfried Bony, who also scored
Iheanacho teed up goals for Kevin De Bruyne and fellow teenager Manu Garcia while Yaya Toure also struck from the penalty spot
Pellegrini said: "I think this moment it's important for the team to have Kelechi and Bony as options without Kun (Aguero).
"They can play both together as they did tonight
Bony played well tonight
Of course Kelechi was very impressive but Wilfried also knows he has all my trust and his team-mates' trust.
"Kun is impossible to replace but we know we have another option in attack."
City will now play Championship side Hull in the last eight but Pellegrini is not looking too far ahead.
He said: "We are not thinking about the trophy
We are just in the quarter-final
We must focus on our next game which is Norwich."
The downside for City was another knee injury to right-back Pablo Zabaleta, who has already missed more than a month of the campaign.
Pellegrini said: "Pablo had the same injury he had two months ago
The same ligament, the same knee
It's the medial ligament."
Palace rarely threatened after falling behind to Bony's 22nd-minute opener, registering just a late consolation through Damien Delaney.
Manager Alan Pardew made six changes for the game, some of them enforced, and acknowledged his side were always likely to face a difficult night.
He made a special point of applauding fans after the final whistle.
Pardew said: "It was not so much an apology, but a thank you
We need to make sure we keep our fans with us.
"I know some of the fans had trouble getting here, so we'd like to say thank you and I hope we can repay them later in the season.
"It was a disappointing display, more offensively than defensively
We kept turning the ball over.
"Almost every time City had a chance they punished us, particularly in the first 60 minutes and that was very much the story."
Source : PA
Source: PA