United managed to claw themselves to the shoot-out via an Amy Andrews goal in the 88th minute which made it 2-2 at the end of an entertaining contest.
It was United who raced into an early lead after 12 minutes when Elysia Boddy fired a stunning strike over Laura Giuliani and into the top corner from the edge of the area.
However, the Lasses' lead didn’t last very long with Milan taking a 2-1 lead by the 24th minute thanks to goals from Nikola Karczewska and Valentina Cernoia.
After a cagey start to the first half, Shania Hayles' piece of magic on the halfway line saw her nutmeg her marker before setting Boddy away down the left.
The Magpies' number six decisively cut in from the right, steady herself and fired the ball over Giuliani from the right hand side of the box.
AC Milan bounced back very quickly with Marinelli beating the offside trap to set up Karczewska who had the simple job of tapping home from inside the six-yard box.
Just four minutes later and Newcastle found themselves behind. Marinelli dispossessed Charlotte Potts just outside the 18-yard box before Milan worked the ball to Cernoia, who took one touch before firing beyond Hannah Hawkins and into the bottom corner.
Newcastle responded well to going behind and almost levelled things up five minutes from half time, but Giorgia Arrigioni somehow cleared Rachel Furness' towering header off the line.
A stop-start second half saw chances at a premium, and it was the away side who looked set to add a third when Chante-Mary Dompig looked to be one-on-one with Hawkins, only for Lia Cataldo to put in a goal-saving block.
With both sides making several changes in the second half, it was difficult for either side to take control, but United managed to claw themselves level with two minutes left to pay.
A neat piece of work from Andrews saw her poke the ball past a Milan defender before scoring an audacious lob from 20-yards out and duly soaked up the applauds in front of the Gallowgate End.
Both sides scored their opening penalties in the shoot-out via Dompig and Andrews before United's goalkeeper made a decisive intervention, pulling off a stunning save from Marta Mascarello with the scores level at 1-1 in the shoot-out before standing tall and watching Evelyn Ijeh’s crucial spot kick crash off the bar.
Newcastle United Women: Hannah Hawkins, Lia Cataldo (Olivia Watt 81), Charlotte Potts (Hannah Greenwood 81), Deanna Cooper, Demi Stokes, Beth Lumsden (Jasmine McQuade 45), Rachel Furness (Amber-Keegan Stobbs 67), Elysia Boddy (Georgia Gibson 81), Katie Barker (Sophie Haywood 45), Amy Andrews, Shania Hayles (Kacie Elson 52).
