Mikel Merino came off the bench to snatch victory for Luis de la Fuente's defending European champions as they now take on Belgium in the quarter finals on July 10.
Defeat meant the end of Roberto Martinez's time in charge of the Portugal national team, as he stepped down immediately after the game, and Cristiano Ronaldo is expected to make a call on his own international future in the coming weeks.
Ronaldo was visibly upset as his final chance to win a World Cup slipped away, and the 41-year-old could now call time on a Portugal career spanning over two decades, which places him as No.1 for international appearances and goals scored.
However, despite the focus of it being an end of an era for Portugal, their overall showing in the competition has gained mixed reviews, after winning just one of their group stage games.
Draws with Colombia and DR Congo meant a tougher knockout stage path, and Martinez's charges were fortunate to get past Croatia in the Round of 32, after a late VAR call in their favour.
Former star, and UEFA Euro 2016 winner Ricardo Quaresma believes they got what they deserved, as several key players failed to perform.
"Everyone is saying this team is the best in Portugal's history, but in what way? What have they won? We're going home with our heads down.
"In midfield, we have great players and lots of talent, but they were very weak at this World Cup. The attack was the same, and the defence was lost. The best thing is that I stop here; otherwise I'll say things I'll regret later."
Ronaldo is not the only Portugal player considering international retirement at this stage with Bernardo Silva and Joao Cancelo also candidates to step down from the Seleção.