Liverpool star Harry Kewell, the man of the match, sent the Australians into the second round for the first time in only their second World Cup tournament in 32 years with the equaliser 10 minutes from full time.
Passions overflowed in the final minutes with referee Graham Poll issuing red cards to Croatia's Dario Simic and Josip Simunic and Australia's Brett Emerton, who now will miss Australia's second round match against Italy on Monday.
Kewell saved the Australians from elimination after a horrendous blunder by goalkeeper Zeljko Kalac had gifted the Croatians their second goal 13 minutes after half time.
Kalac, one of six Australian players with Croatian background, had an eventful match picking the ball out of his own net after just two minutes off a free kick and then fumbling Niko Kovac's volley to allow the ball to go over the line.
Kalac was a surprise selection by coach Guus Hiddink ahead of regular keeper Mark Schwarzer, who had kept goal in the other two group games against Japan and Brazil.
The Australians went into the final group match two points ahead of Croatia and only needed a draw to reach the last sixteen. Australia, galvanised by the coaching of Dutchman Hiddink, showed incredible tenacity to fight back from being behind twice in the match before 56,000 fans.
The Aussies recovered from the shock of a second minute goal off a Darijo Srna free-kick to take the game to the 1998 semi-finalists in a dramatic opening half.
Mark Viduka chopped down Niko Kovac just outside the area and Srna beat Kalac with a swinging free kick to his right. It was Croatia's first goal of the tournament and gave them a huge lift so early in the match they had to win.
But the Australians recovered their poise and controlled the game for most of the opening half having several scoring chances before Craig Moore levelled in the 38th minute.
Referee Poll gave a penalty when Stjepan Tomas handled the ball in the area under Tim Cahill's challenge andMoore left goalkeeper Stipe Pletikosa stranded to equalise.
The Socceroos thought they should have had a seventh-minute penalty when Australian-raised defender Josip Simunic appeared to foul Viduka but the Australian skipper's pleas for a spot-kick were ignored by Poll.
Cahill had a header saved by Pletikosa on the half-hour and a minute later the goalkeeper had to dive to divert a rasping Harry Kewell left-foot volley away for a corner.
Australian midfielder Tim Cahill said: "This is unbelievable. It's a historic day for Australia. We fight, we respect each other, our team is like a family, we're disciplined."
Asked how he felt about taking on Italy in the knockout phase, Cahill told German television: "We're confident. We've shown what we can do."