Milan double hopes hurt by semi-final draw
Milan, six points clear in Serie A, took the lead after four minutes when Zlatan Ibrahimovic turned in a deep Massimo Oddo cross at the far post as the Swede returned in the midst of a three-game league ban.
However, Palermo levelled after a beautifully-crafted goal from Argentina playmaker Javier Pastore on 14 minutes and surged ahead when Uruguayan forward Abel Hernandez scored from a tight angle early in the second period.
Milan substitute Urby Emanuelson grabbed the equaliser by netting a loose ball after good work from Ibrahimovic but the hosts, who had a number of other chances despite fielding a weakened team, will be annoyed to have only drawn.
"Now let's think about the championship," Milan coach Massimiliano Allegri told Rai TV.
"We risked letting in a third goal but we could have also scored one. Tonight the most important thing was not to lose."
Rossoneri midfielder Andrea Pirlo made his first start in over two months after knee trouble.
The return leg in the much-maligned competition takes place in Sicily on May 10.
In Tuesday's first semi-final first leg, holders Inter Milan won 1-0 at AS Roma.