Daniel Vettori needed two off the last ball to win the game and the series but could only manage one off Luke Wright. New Zealand had looked like they would reach their target of 341, but Jamie How was out for 139 in the last over.
England's total of 340-6 was partly due to Paul Collingwood (54) hitting the fastest one-day fifty by an Englishman.
The incredible ending means England can still level the five-match series by winning at Christchurch on Saturday.
New Zealand gave England the opportunity to bat first on a perfect pitch and the tourists responded by rattling up their third highest score in one-day internationals.
The out-of-form Alastair Cook was handed an early lifeline when wicket-keeper Brendon McCullum unbelievably dropped the most straightforward of chances.
England capitalised on their good fortune and while Phil Mustard blazed a trail of runs, Cook began to show his own class with some effective pulls and drives.
Mustard brought up his maiden one-day fifty with a typically risky chip over the vacant slip area for four and Cook followed soon after with a sumptuous extra-cover drive. They both looked completely in control - until Vettori turned to the wildcard wiles of medium pacer Jesse Ryder. After an opening stand of 158, he tempted Mustard to hit to Jacob Oram on the long-on boundary and next ball, after the batsmen had crossed, he sneaked one through Cook's defences.