Real now lead their bitter rivals and reigning champions Barcelona by one point, although the Catalan club have a game in hand and play Real Betis on Sunday.

To use the famous cliche of football being a game of two halves, Espanyol dominated the first period with Walter Pandiani getting a hat-trick, all scored with his lethal left foot, to give the visitors a 3-1 lead at the break.

However, Real showed their fighting spirit to bounce back with three second-half goals and grabbed three points with the last-gasp strike from the Argentine striker, who scored for the first time in front of his home fans.

"We performed heroics," said Real coach Fabio Capello reflecting on their three second-half goals.

"I'm happy because I liked the character that my team showed, having the motivation to recover and win. Each game is a final, we can't afford to drop points because Barcelona are still on top.

"We made some bad defensive mistakes but I still think their first and third goals were offside," added the Italian.

The triumph kept Real in the Spanish title race but for Espanyol the defeat was a bitter blow ahead of Wednesday's all-Spanish UEFA Cup final against Sevilla.

"We had the game and then let it go," lamented Espanyol coach Ernesto Valverde.

"We intended to win in order to build our confidence ahead of Wednesday but if Real continue to play like they did in the second half then they will be champions," added Valverde.

Pandiani opened the scoring and silenced the capacity 75,000 crowd in the Santiago Bernabeu stadium from just outside the six-yard box after 15 minutes, after Francisco Rufete had outpaced his markers down the right wing.

The same combination worked to perfection again just 11 minutes later before Ruud Van Nistelrooy, the Spanish first division's top scorer, got one back from close range four minutes later to notch up his 22nd goal of the season.

Pandiani then got a spectacular third goal after 34 minutes to again leave Real facing an uphill battle.

Some terrible marking from Real left Pandiani the time to lob the ball past Real's stunned goalkeeper Iker Casillas from almost exactly the penalty spot thanks to a perfect pass from Moha El Yaagoubi.

Real's fightback started four minutes into the second half after captain Raul Gonzalez sent the ball through the legs of Espanyol goalkeeper Carlos Kameni.

Kameni's night went from bad to worse after 57 minutes when he collided with his own defender Francisco Chica, leaving the pair on the ground and an open net for Jose Antonio Reyes to score.

If Kameni was to blame for Real's third goal then the culprit for giving away the winner was definately Chica, who was robbed by Higuain out on the left flank.

Higuain then played a neat one-two with Van Nistelrooy before finding the net with his right foot.

"I think it is the most important goal of my life. This game will go into the history of Real Madrid because of the way we played," said Higuain.

Sevilla stay in third place, one point behind Barca and two behind Real, after beating local rivals Reacreativo Huelva 2-1 later on Saturday.

Enzo Maresca opened the scoring after 14 minutes, chesting down a Luis Fabiano header before blasting it into the net with his right foot from the edge of the area.

Luis Fabiano added Sevilla's second from the penalty spot nine minutes before the whistle after he had been brought down by Recreativo midfielder Jesus Vazquez.

Vazquez then scored from the spot himself one minute from time after Julian Escude had pushed Recreativo's Ikechuckwu Uche but there was too little time left for Huelva to salvage a point.

Barcelona will try to reclaim the top spot in La Liga and put behind them their dismal 4-0 loss in the Spanish Cup at Getafe on Thursday when they face struggling Real Betis on Sunday.