Substitute Mike Harris broke Welsh hearts with an injury-time penalty to snatch a dramatic 25-23 win for Australia in Melbourne.
Wales appeared on course to keep the series alive with an historic first win over the Wallabies in Australia since 1969 as the faultless boot of Leigh Halfpenny kept the Grand Slam champions in front.
But with the clock in the red New Zealand referee Chris Pollock penalised Wales after Australia launched a powerful rolling maul and Harris showed nerves of steel to crush Welsh dreams.
Wales came flying out of the blocks with a series of powerful pick and drives. Mike Phillips, Halfpenny and Alex Cuthbert were all prominent in the build up as Wales roared into the Wallabies half before George North powered over from close range. Halfpenny maintained his 100 per cent record Down Under to stretch Wales' early lead to seven points.
Berrick Barnes hit back for the hosts and added a second penalty on the half-hour mark to cut Wales' lead to one point. Wales did themselves no favours and lost a succession of lineouts on their own throw as the pressure mounted.
Wales were penalised after pouncing on loose ball from a lineout. Phillips handed the Wallabies another opportunity to attack after his box-kick went out on the full and Barnes beat Sam Warburton on the outside to dummy past Ashley Beck and release Rob Horne for the crucial try. Barnes then added the extras on the stroke of half-time.
But the Dragons again started the half firing. Will Genia threw an aimless pass which was hacked through by Beck and Jonathan Davies beat Rob Simmons in the foot race to score. Halfpenny expertly slotted the conversion to regain the lead, and the full-back exchanged penalties with Barnes as Wales kept their noses in front.
Barnes knocked over another penalty but Australia were dealt a blow when Cooper Vuna was sent to the sin-bin after a clumsy challenge on Halfpenny in the air. The diminutive full-back slotted a monster penalty to regain the slender lead. Barnes hit-back after Bradley Davies was penalised at the break down but Halfpenny was again on target.
Wales continued to dominate the battle up front but they fell foul of the scrum lottery and Barnes stepped up to slot the simple penalty. But amazingly the fly-half, who appeared to be carrying a knock, pushed his effort wide and quickly departed to be replaced by Harris.
Australia frantically hammered at Wales but Rob Howley's men held strong as mistakes creeped into the Wallabies game. But Wales were penalised with the clock ticking and Australia kicked to the corner. They launched a rolling maul and Wales were penalised, with New Zealand-born fly-half Harris writing his name in Wallaby history.