Needing at least a draw to keep their Ashes defence alive, the tourists were energised by the finger spin of Panesar and produced some of their best bowling of the series to dismiss the Australians cheaply after they won the toss and chose to bat.
The home side struck back late in the day to have England 51 for two at stumps on Thursday, with Andrew Strauss on 24 and Paul Collingwood on 10.
The Australians removed opener Alastair Cook and No.3 Ian Bell cheaply, Glenn McGrath and Brett Lee picking up a wicket apiece, while Shane Warne dropped Collingwood at first slip off Stuart Clark late in the day.
Although local player Mike Hussey held the Australian innings together with an unbeaten 74, Panesar grabbed 5-92 from 24 overs and a rejuvenated Steve Harmison took 4-48 to rock the home side's hopes of wrapping up the Ashes here.
Panesar, controversially overlooked for the first two Tests, claimed his third five-wicket haul in his short Test career and became just the fourth left-arm spinner to claim five wickets in a Test at the WACA.
Called into the attack just minutes before lunch, Panesar had an immediate impact and celebrated when he claimed opener Justin Langer's wicket with his seventh ball and the last delivery before the break.
Langer was clean bowled when he pushed forward defensively and played down the wrong line.
It was the start of an extraordinary day for Panesar.
He took some damage from the recalled Andrew Symonds, who hit two sixes in three balls and took 17 runs off Panesar's 13th over.
However, the spinner had his revenge in the following over when Symonds cut at a shortish delivery and got a thin edge to wicketkeeper Geraint Jones, who snared the catch at the second attempt.
Panesar's next over saw him claim the prized wicket of Adam Gilchrist, who walked when he was caught without scoring by a diving Ian Bell at short-leg after the ball came off the pad and brushed his gloves.
Australia then slumped to 214 for seven when Panesar struck again to remove an aggressive Shane Warne, who attempted to cut him and got a fine edge into the gloves of Jones.
Panesar grabbed his fifth wicket when Brett Lee stretched forward and was adjudged lbw by umpire Aleem Dar.
While Panesar was the hero, embattled paceman Steve Harmison bounced back strongly to pick up four wickets, including a sharp catch off his own bowling to remove the dangerous Michael Clarke for 37.
Harmison was under siege after claiming just one wicket in the first two Tests, but claimed the crucial wicket of Australian captain Ricky Ponting, trapped lbw for two.
There was a slight question over the height of the delivery but Harmison was elated to have an early victim after his woes in the first two Tests.
Harmison's second wicket was memorable - the big fast bowler somehow hauling in a Clarke pull shot on his follow through.
He then bowled without luck late in the day, until he removed Stuart Clark and Glenn McGrath in quick succession to clean up the tail.
It was an unexpected scenario after the home side rattled up 47 runs without loss in the first hour of the day.
England struck back to claim 3-22 after the first drinks break, with Matthew Hoggard sparking the fightback and continuing Matthew Hayden's poor Ashes series when he had the opener caught behind for 24.
Hayden has just 222 runs in his past 10 Test innings, with one half-century against Bangladesh.
Harmison then struck a key blow when he removed Ponting, before Panesar came into the attack and turned the series on its head.
Australia 244 all out ( Michael Hussey 74 n o, Justin Langer 37, Michael Clarke 37, Shane Warne 25; Monty Panesar 5 for 92, Harmison 4 for 48) Vs England 51 for 2 (Andrew Strauss 24 n o; McGrath 1 for 18, Brett Lee 1 for 24)