Michael Essien scored in the last minute to book Chelsea's place in the Champions League semi-finals and break Valencia's hearts in the Mestalla.
Ballack (left) rushes to congratulate Chelsea hero Essien
Essien's angled drive beat Santiago Canizares at his near post, a disaster for the keeper who had just made a wonder save to deny Michael Ballack.
Valencia took the lead when Joaquin crossed for Fernando Morientes to slide in, just after Morientes hit a post.
Andriy Shevchenko levelled from close range before Essien won it late on.
Chelsea's incredible comeback looks likely to set up an all-English last-four tie with Liverpool, presuming they finish the job against PSV Eindhoven on Wednesday.
It was a stunning climax to an absorbing contest and Chelsea deserved their reward for a second-half display full of guts and determination.
Valencia made the better start to the game, but having failed to snatch an early goal they looked happy to sit back and soak up Chelsea pressure.
The visitors had chances early on, as Ricardo Carvalho and Shevchenko both nodded wide and Ballack's powerful header was saved by Canizares.
Valencia were not threatening at all. But as the clock ticked around to the half-hour mark, they suddenly came to the party.
David Villa exploded into life and surged at the Chelsea defence, playing in Morientes, who saw his thunderous left-foot strike cannon back off the post from 20 yards.
Moments later, Valencia led. Joaquin crossed from the right and the Chelsea defence uncharacteristically went missing, Morientes sneaking in at the far post to half-volley home from six yards.
Drogba nearly levelled soon after, the Ivorian's flashing header superbly clawed away from the top corner by the 37-year-old Canizares.
Morientes wheels away after his first-half strike
Chelsea needed a response straight after half-time and Jose Mourinho walked down the tunnel before the first period had ended to gather his thoughts ahead of a crucial 15 minutes in their season.
Yet again, the Portuguese master-manager worked the oracle, as the Blues hauled themselves level just seven minutes after the restart.
It was scrappy, but they all count. An Essien free-kick fell to Drogba and as Roberto Ayala could only divert his shot into Shevchenko's path, the striker slammed in from two yards.
Suddenly it was the travelling Blues fans who were in full voice as the partizan home crowd were instantly silenced.
On the pitch, Chelsea turned up the heat. One more goal and Valencia would need two, and Drogba forced Canizares to save low to his left from a quick counter-attack.
It was turning into a classic European tie, as Shevchenko crashed one wide and Miguel Angel Angulo fired over as the two heavyweights traded blows.
With five minutes to go, Canizares made one of the greatest saves you could ever wish to see.
Ballack's bullet header from Frank Lampard's free-kick was destined for the bottom corner, only for the keeper to get down to his left and somehow not only save it with his left hand, but get it up and over the crossbar.
But the bleach-blond custodian dramatically went from hero to villain in the dying stages as he left a crucial gap at his near post for Essien to rifle in a winner.
The win is almost certain to see Chelsea play Liverpool in the semi-final - a repeat of the 2005 semi-final, which the Reds won 1-0 on aggregate.
Liverpool lead PSV Eindhoven 3-0 after the first leg of their Champions League quarter-final.
Valencia: Canizares, Miguel, Ayala, Moretti, Del Horno, Joaquin, Albelda, Albiol (Hugo Viana 72), Silva, Morientes (Angulo 65), Villa.
Subs Not Used: Butelle, Jorge Lopez, Curro Torres, Nacho Insa, Pallardo.
Booked: Del Horno, Albelda, Ayala, Moretti. Goals: Morientes 32.
Chelsea: Cech, Diarra (Joe Cole 46), Carvalho, Terry, Ashley Cole, Mikel, Essien, Lampard (Makelele 90), Ballack, Shevchenko (Kalou 90), Drogba.
Subs Not Used: Cudicini, Bridge, Ferreira, Wright-Phillips.
Booked: Essien, Ballack.
Goals: Shevchenko 52, Essien 90.
Ref: Kyros Vassaras (Greece).