Uruguay substitute Sebastian Abreu got the decisive penalty with a cheeky chip over goalkeeper Richard Kingson to send his team into the semi-finals for the first time in 40 years where they will play Netherlands, who earlier shocked Brazil 2-1.
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Uruguay and Ghana could not be separated after extra-time in a thrilling contest after Asamoah Gyan hit the bar with a penalty in the second minute of added time that was given when striker Luis Suarez handled on the line and was sent off.
Having escaped by the skin of their teeth Uruguay had keeper Fernando Muslera to thank for two saves in the shootout.
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"We are very excited. These boys deserve everything. Today we didn't play well. It seems there's something forcing us on, it must be the strength and unity of these boys," said Uruguay manager Oscar Tabarez.
VERY PROUD
Ghana coach Milovan Rajevac added: "I think we had more opportunities than our opponents but that's football. We really had good support and it would have been a fairytale but I would like to congratulate Uruguay. I'm very proud.
"The whole of Africa supported us. We didn't deserve to lose this way. It's difficult but we're proud of what we achieved," he added after Ghana became only the third African team to reach the quarter-finals following Cameroon and Senegal.
Ghana had taken the lead with a speculative strike by Sulley Muntari just before the end of the first half of normal time but that was cancelled out by a masterful Forlan freekick 10 minutes after the interval that brought the sides level.
In a game of wildly changing fortunes, twice World Cup winners Uruguay had dominated the opening stages as they worked hard to set Forlan and strike partner Suarez free.
Ghana, despite enormous support from their fellow Africans packing the stadium, surrendered the ball too easily to a hard-tackling Uruguay midfield.
It appeared to be going Uruguay's way as they created the chances with Forlan blasting the ball over the bar and then minutes later Suarez's shot was tipped over by Kingson.
SPECTACULAR DRIVE
Ghana suddenly woke up, though, and won their first corner from which central defender Isaac Vorsah should have opened the scoring but only managed to head wide. Minutes later striker Asamoah Gyan was sent through only to shoot wide.
Uruguay's defence, which had only let in one goal on the way to the quarter-finals, suffered a blow when captain Diego Lugano had to limp off and was replaced by Andres Scotti.
Then in added time at the end of the first half, Muntari struck a spectacular long-range drive to put
