The Spanish side won 2-1 on the night and progressed through with a 3-2 aggregate as United's Nani was sent off for a challenge on Alvaro Arbeloa.
United were lucky to go ahead at the start of second half, thanks to Sergio Ramos' own goal in the 48th minute. But a harsh controversial red card for Nani hardly 8 minutes later proved decisive.
Real manager Jose Mourinho immediately brought in Luka Modric for Arbeloa and his tactics worked wonders as the Croatian equalised with a brilliant strike. Three minutes later United were in a more trouble as their former hero Ronaldo slid in from Gonzalo Higuain's cross to leave United needing two goals to survive in the tie.
United boss Sir Alex Ferguson took a huge decision to leave Wayne Rooney on the bench while Ryan Giggs' 1000th senior game ended in defeat.
Borrusia Dortmund progress
Dortmund thrashed Ukranian side Shakhtar Donetsk winning 3-0 and going through with a 5-2 aggregate.
Felipe Santana opened the scoring with a strong header while Mario Gotze made it two after meeting Robert Lewandowski's cross and Jakub Blaszczykowski made it three to ensure Dortmund's qualification.