Never in 106 attempts in Europe's premium club competition had a team progressed in a knockout tie after a 2-0 home defeat, but Rashford's stoppage-time penalty put Ole Gunnar Solskjaer's side through in the most dramatic fashion.
The visitors, severely depleted by injuries, went ahead twice in the first half through Romelu Lukaku but Juan Bernat equalised for the French champions in between.
PSG were set to advance to the last eight 3-2 on aggregate before referee Damir Skomina awarded United a penalty for a Presnel Kimpembe handball after a lengthy delay for the VAR review and Rashford lashed home the spot-kick to level the tie at 3-3.
PSG had only lost two of their last 50 European games at the Parc des Princes but will be stunned by the latest failure in the Champions League, where, despite investing untold money into their team, they have still yet to reach the semi-finals.
Solskjaer, who had half his regular starters missing the game through injury or suspension, had said his team needed to score the opening goal to make the comeback possible.
Manchester United's Marcus Rashford celebrates scoring their third goal with team mates.
It could not have started better for the visitors, who went ahead after Lukaku intercepted a weak back pass from Thilo Kehrer, rounded Gianluigi Buffon and slid the ball into the empty net.
But PSG dominated possession and the equaliser seemed inevitable, arriving in the 12th minute when Bernat knocked in Kylian Mbappe's cross at the far post to level the match.
The hosts continued to control possession but United took the advantage again with their next chance.
Buffon let a fierce Rashford shot bounce off his chest into the path of Lukaku who poked home the rebound to continue his rich vein of scoring form.
PSG, with injured Brazil striker Neymar watching from the stands, looked nervous throughout the second half and were unable to find a second goal but they seemed to have done enough to make the last eight until substitute Diogo Dalot fired in a speculative shot in stoppage-time.
Barely anyone seemed to notice the handball, though Dalot claimed it but Skomina called for a review. TV pictures showed that the ball hit the back Kimpembe's arm as he jumped and, after a lengthy wait, the referee awarded a penalty.
Rashford, who had never taken a penalty in a competitive game for United, kept his nerve to smash it beyond Buffon.
PSG desperately pushed for the goal that would have sent them through in a further four minutes of play as Edinson Cavani replaced Dani Alves, but United held firm and the home players sunk to the ground in disbelief at the final whistle as their fans celebrated an extraordinary victory.