Denmark scored two late goals to leave England needing a point on Saturday to qualify for the last four of Euro 2005.
Fara Williams put England ahead from the penalty spot after Rachel Yankey was brought down by Mariann Knudsen.
And England skipper Faye White almost increased the lead but flicked over from close range after a Yankey cross.
However, Merete Pedersen bent in a free-kick with 11 minutes left and Cathrine Paaske Sorensen headed the winner two minutes from the end.
Qualification for the semi-finals now rests on the result of their final group match against Sweden - also at Blackburn - on Saturday.
England need a draw to go through thanks to Sweden only drawing 0-0 with Finland on Wednesday.
England were the better side for 89 minutes and should have been ahead before the break.
Kelly Smith had England's first good chance on seven minutes, swivelling on the edge of the area and shooting into the outside netting.
On 14 minutes, Williams found Karen Carney in acres of space but the young striker stepped on the ball.
Soon after, Merete Pedersen had Denmark's only chance of the first half, directing a header straight at Jo Fletcher in the England goal.
England continued to press and on 34 minutes the impressive Yankey delivered a fine cross but Amanda Barr could only glance the ball wide.
Yankey had a chance of her own on the stroke of half-time, volleying across the face of goal after some good footwork from Carney.
Six minutes after the restart, Yankey was brought down by Mariann Knudsen and Williams gave England the lead with a perfectly-placed spot kick.
Two minutes later, Williams tested Tine Cederkvist with a stinging shot before Vicky Exley, on for Smith, blazed over.
On 70 minutes, White somehow directed a Yankey cross over at full stretch and Denmark were invited back into the game.
Eleven minutes from the end, Williams left her studs up on Bettina Falk just outside the England box and Pedersen stroked home the free-kick.
And England's defenders went missing with two minutes on the clock, leaving Sorensen to steal in and score from Johanna Rasmussen's deep cross.
Denmark: Cederkvist, Falk, Katerine Pedersen, Andersen, Knudsen, Hansen., Sorensen, Nielson (Christensen 71), Merete Pedersen, Rasmussen, Johansen (Lene Jensen 58).
Subs Not Used: Stine Jensen, Dorte Jensen, Cecilie Pedersen, Bjerg, Olsen, Nielsen, Petersen.
Goals: Merete Pedersen 80, Sorensen 88.
England: Fletcher, Scott, Unitt, Chapman, White, Phillip, Williams, Barr (Aluko 64), Yankey, Smith, Carney.
Subs Not Used: Handley, Westwood, Brown, Stoney, Exley, Asante, Johnson, Hall.
Booked: Chapman, Williams.
Goals: Williams 53 pen.
Ref: Alexandra Ihringova (Slovakia).