Two goals in the last six minutes by AC Milan's Ronaldinho and Filippo Inzaghi pegged back Tony Adams' injury-hit team on a dramatic night at Fratton Park.
Portsmouth kept their UEFA Cup hopes alive against the seven-times European champions with a superb display crowned by Younes Kaboul's glorious 62nd-minute header and FA Cup hero Kanu's close-range finish 11 minutes later.
But then substitute Ronaldinho struck a wonderful 30-yard free-kick and Inzaghi, who had twice hit the post, confounded the battling hosts by knocking in Gianluca Zambrotta's pass nearly two minutes into stoppage time.
Milan will almost certainly still go through to the last 32 but Pompey need to add more points from remaining fixtures against Germany's Wolfsburg and Holland's Heerenveen.
On a marvellous night of thrills, the chances were soon coming thick and fast with Inzaghi shooting against a post after Andriy Shevchenko's 10th-minute free-kick from 40 yards pierced the Pompey wall.
James thanked his lucky stars when the ball bounced off the woodwork straight into his arms.
And his relief was obvious again when Inzaghi, still a predator at 35, and Shevchenko both spurned good opportunities.
Kaka jabbed his shot over the bar at full stretch after Sylvain Distin could only half clear, and Inzaghi's lob was also just too high as he ran through after a deflection.
But Pompey were making chances too, and Milan keeper Dida appeared to misjudge Glen Johnson's cross completely before finally grabbing it off Peter Crouch's head.
The Pompey crowd, always vociferous, excelled themselves with an ear-splitting noise.
It was truly end-to-end stuff with the dangerous Inzaghi nearly stealing in again before Johnson and Distin tidied up.
Then a diving Crouch headed Johnson's cross wide in 36th minute just after Philippe Senderos blocked him off going for the nippy Nadir Belhadj's neat delivery.
Kaka was lucky not to be booked for some crude hacking at Glen Little's heels and Milan were having to get physical to combat Pompey's impressive fighting spirit.
The Italians had long given up their early plan of ball retention to meet their vibrant hosts head-on in an exciting battle.
Pompey had to play without the injured Jermain Defoe, Sol Campbell, Niko Kranjcar and the massively influential Lassana Diarra.
They needed at least a draw to keep their hopes of third-round qualification alive after a 3-0 defeat in Portugal against Braga last month.
Milan, with two UEFA Cup group-phase wins under their belt already, were virtually through even if beaten at Fratton Park.
It was still fast and furious after the break and when Kanu got through down the left and sent a far-post cross beyond Crouch, the roaring home crowd thought winger Little had scored as he followed up but his shot had lodged into the outside of the netting.
There was no doubt about £5million defender Kaboul's strike though, as he rose for Johnson's cross after Milan failed to clear just after the hour.
And when Johnson delivered again Kanu was on the end of it to slide home and seemingly clinch it.
But Milan proved their magic can last right until the end - even though at times they were outplayed.
