Ricardo was the hero for Portugal with three penalty saves
England lost skipper David Beckham to injury just after half-time and Wayne Rooney was sent off after 62 minutes for a stamp on Ricardo Carvalho.
They battled on bravely for the rest of normal time and extra-time with 10 men to take the game to a shoot-out.
But Frank Lampard, Steven Gerrard and Jamie Carragher missed to end their hopes and Sven-Goran Eriksson's reign.
The Swede leaves his post as England coach after going out at the quarter-final stage of a major tournament for the third time in succession and now hands over to Steve McClaren.
Eriksson had promised a big performance from his side but until Rooney's early exit it was not forthcoming.
The young striker endured a frustrating game and his patience finally snapped as he got tangled up with Carvalho and Armando Petit and appeared to aim a stamp at the Chelsea player's groin.
Elizondo took a moment before sending Rooney from the field and with him seemingly went England's World Cup hopes.
But roared on by the England fans that made the AufSchalke Arena like a home game, they finally showed the passion and heart for a battle so often missing in this World Cup campaign.
Portugal were far from their best but they at least caused some worrying moments at the back for England in a tense first half.
A deep Luis Figo free-kick was not dealt with by Gary Neville or Lampard and there was huge relief for England to see Tiago slip with the goal at his mercy.
Tiago almost caused further problems when he was given a free header in the box that Paul Robinson clambered across to save.
Eriksson was forced to change things round six minutes into the second half with Beckham struggling with an ankle problem.
Beckham almost won a penalty with his last contribution of the game - and probably his chances of winning a World Cup - when his cross hit the hand of Nuno Valente but England's appeals came to nothing.
He was replaced by Aaron Lennon and was seen on the sidelines looking anguished as treatment was performed on his ankle, although he did later bear the pain long enough to berate the referee following Rooney's dismissal.
Rooney saw red after 62 minutes for stamping on Carvalho
Lennon's introduction gave England brief hope as his pace took him past two players, but when the ball fell for Rooney he almost completely missed and Joe Cole's effort was just too high.
But then came Rooney's premature exit, with Joe Cole sacrificed for Peter Crouch.
With temperatures again close to 30C it seemed only so long that England's brave 10-man backs-to-the-wall effort could hold out the Portugal onslaught.
England's best hope of a goal was a set-piece and Lampard fired in a free-kick that Ricardo did well to keep out, with Lennon scuffing his attempt to put in the rebound.
A deflected John Terry shot just looped over the bar after some brilliant work from an outstanding Owen Hargreaves, but Helder Postiga also blazed over in a nerve-jangling injury time.
The drama continued through to extra-time with England showing remarkable energy to match their opponents.
Crouch almost got on the end of a Gerrard cross but at the other end it needed some desperate last-ditch defending and some solid keeping from Robinson.
The game seemed destined to be decided by a penalty shoot-out, just like when the sides met at the same stage of Euro 2004.
And unfortunately for England it ended in the same result - with Portugal coach Luiz Felipe Scolari getting the better of Eriksson.
Only Hargreaves - who had easily his best game in an England shirt - was successful from the spot.
Lampard, Gerrard and Carragher - who scored at the first attempt but had to retake - all saw their efforts saved by Ricardo, who became the first player in World Cup shoot-out history to save three penalties.
Hugo Viana and Armando Petit had missed to give Eriksson's side brief hope, but when Helder Postiga and Ronaldo scored England's dream of being crowned world champions was over for another four years.
Portugal now face France in Wednesday's semi-final in Munich.
England: Robinson, Neville, Terry, Ferdinand, Ashley Cole, Hargreaves, Beckham (Lennon 51), Gerrard, Lampard, Joe Cole (Crouch 65), Rooney, Lennon (Carragher 118).
Subs Not Used: Campbell, James, Bridge, Jenas, Carrick, Downing, Carson, Walcott.
Sent Off: Rooney (62).
Booked: Terry, Hargreaves.
Portugal: Ricardo, Miguel, Meira, Ricardo Carvalho, Nuno Valente, Figo (Postiga 86), Maniche, Petit, Tiago (Viana 74), Ronaldo, Pauleta (Simao 63).
Subs Not Used: Paulo Ferreira, Caneira, Ricardo Costa, Quim, Boa Morte, Nuno Gomes, Paulo Santos.
Booked: Petit, Ricardo Carvalho.
Att: 52,000.
Ref: Horacio Marcelo Elizondo (Argentina).
Fifa man of the match: Owen Hargreaves
TRIVIA
Portugal and England were involved in the third penalty shoot-out of the 2006 World Cup. Only the 1990 finals produced more (four). England and Italy are the only nations to have lost all three World Cup shoot-outs they have been involved in. England have been eliminated by a Luiz Felipe Scolari led side in the last three major tournaments.
Wayne Rooney became the third English player to be sent off during a World Cup match. He joined Ray Wilkins (1986) and David Beckham (1998) who also saw a direct red card in a World Cup encounter. Portugal have seen an opposing player sent off on four separate occasions, a figure with which they lead all other nations at the 2006 finals.
This goalless draw was the first time Portugal had failed to win inside 90 minutes at this tournament. However it extended their unbeaten run in competitive matches to 17. It was the Portuguese' 17th World Cup match in their history and the first to finish in a draw.
Trivia stats source: Infostrada Sports
W sobotę w Gelsenkirchen Portugalia pokonała reprezentację Anglii w rzutach karnych. 

W 13. minucie Tiago próbował wykorzystać zamieszanie na polu karnym Anglików, ale Robinson ubiegł go i złapał przed nim piłkę.

W 29. John Terry zderzył się głową z Tiago. Angielski zawodnik dostał za ten faul żółtą kartkę. Dziesięć minut później Luis Figo strzelał w polu karnym Anglii, ale piłka minimalnie minęła bramkę.

Tuż przed zakończeniem pierwszej części gry David Beckham próbował swoich sił wykonując rzut wolny. Piłka po jego wykonaniu trafiła w mur portugalskich obrońców.

Pięć minut po przerwie piłka po strzale Beckhama uderzyła w rękę stojącego w polu karnym Nuno Valente. Sędzia nie podyktował rzutu karnego. Potem, kapitana reprezentacji Anglii zmienił Aaron Lennon.

W 62. minucie Wayne Rooney sfaulował podczas walki o piłkę Ricardo Carvalho. Po przerwaniu gry doszło do przepychanki między Rooney'em a Cristiano Ronaldo. Sędzia pokazał napastnikowi Anglii czerwoną kartkę. Po chwili z boiska zszedł Joe Cole, a e jego miejsce pojawił się Peter Crouch.

Przed końcem drugiej połowy mocny strzał oddał Frank Lampard. Ricardo miał problemy z obroną i wypuścił piłkę przed Aarona Lennona. Jego dobitka była zbyt słaba, aby mogła zagrozić Portugalskiemu bramkarzowi.

W dogrywce Anglicy próbwali dośrodkowywać w pole karne licząc, że piłkę dostanie wysoki Peter Crouch - bezskutecznie. W 107. minucie Helder Postiga umieścił piłkę w bramce Anglii, ale był na pozycji spalonej.

W serii rzutów karnych Ricardo obronił trzy strzały Anglików - Lamparda, Gerrarda i Carraghera.