Gavin Henson kicked a difficult penalty with four minutes to play as Wales secured their first win against England in Cardiff for 12 years.
The hosts led 8-3 at the break thanks to Shane Williams' try, with each side also scoring a penalty.
When Charlie Hodgson edged England 9-8 ahead with 10 minutes to go, it looked as though the visitors would escape.
But Henson drilled over a long-range effort from near the right touchline to send the Welsh fans into raptures.
For the first 10 minutes England's lineout was shocking and when they lost their throw for the third time Wales capitalised.
The hosts swept the ball to the right and when England halted their attack down that flank Wales switched it to the left, where Williams scampered over in the corner for an unconverted score.
Hodgson trimmed the gap to two points with a penalty after deft timing of the pass from Jason Robinson had set Danny Grewcock rampaging forward.
Both fly-halves then missed drop goals but Stephen Jones slotted a penalty after 23 minutes to make it 8-3 to Wales.
The hosts had been creating overlaps at will down the left but did not take full advantage as they failed to commit England's overstretched defence.
However, they forced another great attacking position when Henson's massive kick put Josh Lewsey under pressure and he was caught by Wales captain Gareth Thomas.
The hosts tried to drive from the base of a scrum but Grewcock stepped over the ruck and caught scrum-half Peel with a boot to the face.
The England second row was shown a yellow card for reckless use of the boot and he was followed to the bin by Thomas, who ran 15 yards to push Grewcock and was carded for retaliation.
After the break the England pack began to get the upper hand and the visitors trimmed the gap to two points with a Hodgson penalty after 48 minutes.
But as the half wore on both sides started to commit more and more errors and with 20 minutes to the match was balanced on a knife edge.
England replaced Mathew Tait, who was given a torrid time by Henson, with Olly Barkley and the Bath centre started to get England on the front foot with some precise kicks.
Hodgson put England ahead for the first time with a penalty with 10 minutes to go.
And when the visitors then withstood a sustained assault on their line from Wales it looked as though their long unbeaten run in Cardiff was going to continue.
However, Wales were awarded a difficult long-range penalty out near the right touchline.
Henson had been outstanding all night and he stepped up to rifle the ball unerringly between the posts from 44 metres and clinch a dramatic win for Wales.
Wales: G Thomas (capt); H Luscombe, T Shanklin, G Henson, S Williams; S Jones, D Peel; G Jenkins, M Davies, A Jones; B Cockbain, R Sidoli; D Jones, M Williams, M Owen.
Replacements: R McBryde, J Yapp, J Thomas, R Jones, G Cooper, C Sweeney, K Morgan.
England: J Robinson (capt); M Cueto, M Tait, J Noon, J Lewsey; C Hodgson, M Dawson; G Rowntree, S Thompson, J White; D Grewcock, B Kay; C Jones, A Hazell, J Worsley.
Replacements: A Titterrell, P Vickery, S Borthwick, J Forrester, H Ellis, O Barkley, B Cohen.
Referee: Steve Walsh (New Zealand).