Portugal twice went behind in regulation time but twice fought back to level the scores.
Martin Zubimendi took advantage of some sleepy Portugal defence to put Spain in front after 21 minutes.
The brilliant Nuno Mendes levelled things up five minutes later.
Mikel Oyarzabal, Spain’s goalscorer in the Euro 2024 final and the 2023 Nations League final, put La Roja back in front just before the break.
Cristiano Ronaldo, quiet as he had been before scoring the winner against Germany in the semis, equalised with 61 minutes gone, adjusting quickly after a Mendes cross was deflected into the air, muscling past Marc Cucurella and volleying the dropping ball home.
Ronaldo was subbed off before full-time with cramp. Even though Portugal had the better of extra time, the match went to penalties.
Both sides converted their first three spot kicks. Mendes buried Portugal’s fourth, before Morata stepped up and shot straight at Diogo Costa.
Neves nervelessly converted in front of the red and green of the Portugal fans. The victory was just Portugal’s second competitive win over Iberian rival Spain in their long history.
Portugal’s only other win over Spain in a competitive fixture was a 1-0 victory which booted the Spaniards out of Euro 2004, with a 19-year-old Ronaldo on the left wing.
Portugal became the first two-time winner of the Nations League, launched in 2018. It was Portugal’s third major title, along with Euro 2016.
While Nico Williams and Lamine Yamal’s fluid movement troubled the Portugese defence early in the match, La Roja’s opener was scrappy.
Yamal chipped from outside the box and the Portugal defence froze, botching a clearance which fell to Zubimendi, who leathered the ball into the net.
The goal was just rewards for Spain’s early dominance, but Portugal hit back almost immediately.
Mendes, put through by Pedro Neto, drilled a low shot across the goal and in.
Just before halftime, Spain picked Portugal’s pocket in their own half before advancing. Pedri linked with Oyarzabal, who threaded the ball past Diogo Costa.
Oyarzabal’s goal meant he has scored in three international finals – against England at Euro 2024, which Spain won, and the 2023 and 2025 Nations Leagues, which Spain lost.
Ronaldo had done little other than encourage the heavily Portuguese crowd until that point but would pick his moment to strike.
With 61 minutes gone, Mendes shed a defender and whipped in a cross. The ball took a deflection and Ronaldo outmuscled Cucurella before lashing a volley home.
The goal was Ronaldo’s fourth in 10 matches against Spain. The previous three all coming in a wild 3-3 draw at the 2018 World Cup.
Limping in the dying stages of regulation time, Ronaldo fell to the turf with three minutes left and signalled to the bench that his night was over.
Spain may have been confident when the match went to extra time, having won on penalties in 2023, but Portugal were faultless, Neves stepping up and converting to send his teammates, including a hobbled Ronaldo, streaming onto the pitch. (AFP)