At stumps, on the third day of the second Test, England were 76 for one in their second innings, needing a further 218 runs to reach their victory target of 294 and so go 1-0 up in this three-match series.
No side had ever made more to win an Old Trafford Test than the 231 for three England posted against the West Indies four years ago.
Panesar took six for 37, including his 100th Test wicket.
He surpassed his previous best innings return of six for 126 against New Zealand at Napier in March as the Black Caps, who had been 85 for two, were bowled out for 114 in their second innings.
But of arguably greater significance, on a day when 16 wickets fell, was the five for 66 taken earlier by Panesar's rival left-arm spinner Daniel Vettori.
New Zealand captain Vettori's return helped dismiss England for 202 and so gave his side a commanding first innings lead of 278.
It was the second time in successive innings Vettori had taken five wickets after his man-of-the-match winning five for 69 in the drawn first Test at Lord's.
Vettori struck again before the close when Alastair Cook was well-caught off bat and thigh pad by James Marshall at short leg to leave England 60 for one.
Andrew Strauss was 27 not out at stumps with England captain Michael Vaughan unbeaten on 12. Worryingly for England, this was the 11th straight match since the fourth Test against the West Indies at the Riverside in June where they'd failed to reach the first innings benchmark total of 400.Both teams suffered batting collapses on Sunday.
England lost their last six wickets for 42 runs while New Zealand's final seven fell for 29.
The Black Caps' innings ended when they were nine down because Daniel Flynn was still unable to bat after being hit on the head by a James Anderson bouncer Friday which forced the Northern Districts left-hander to retire hurt.Panesar's return meant that 25 of his 101 Test wickets had been taken here at Old Trafford.A notable feature of the 26-year-old Northamptonshire hero's bowling Sunday was the four lbws he won.
Both Vettori and Panesar made the occasional ball turn sharply, a toubling sight for the batsmen.
New Zealand were reduced to 50 for two after Aaron Redmond was caught in the gully by Paul Collingwood off Anderson and Panesar had Jamie How lbw for 29.
Marshall, swishing across the line when well back, was then plumb lbw to Panesar.
The hard-hitting Brendon McCullum, who made a run-a-ball 97 in the first innings at Lord's, had the ability to take the game away from England.
However, he lasted just three balls before he too was lbw to Panesar after missing a sweep shot.
Vettori holed out cheaply off Panesar to Stuart Broad in the deep. But that still left Ross Taylor, who made a career-best 154 not out in the first innings. However he became Panesar's 100th Test wicket when, on 15, he was lbw.
England had only narrowly avoided the follow-on with No 9 Broad seeing them to safety with 30 after experienced batsmen Kevin Pietersen and Collingwood were among those who both fell cheaply to Vettori.New Zealand's quicks also kept things tight with Iain O'Brien, recalled in place of the ill Tim Southee for his first Test since January, taking three for 49 in 23 overs.
New Zealand 1st innings: 381, LRPL Taylor 154 Jamie How 64, JM Anderson
ENGLAND, 1st innings: 202, AJ Strauss 60, DL Vettori 66-5.
NEW ZEALAND 2nd innings:
JM How lbw b Panesar 29
AJ Redmond c Collingwood b Anderson 6
JAH Marshall lbw b Panesar 28
LRPL Taylor lbw b Panesar 15
BB McCullum lbw b Panesar 0
DL Vettori c Broad b Panesar 4
KD Mills c Ambrose b Panesar 8
JDP Oram c Ambrose b Sidebottom 7
IE O'Brien c Anderson b Sidebottom 6
CS Martin not out 0
EXTRAS: (lb 11) 11
TOTAL: (all out; 41.2 overs) 114
Fall of wickets1-28 (Redmond, 9.3 ov), 2-50 (How, 12.6 ov), 3-85 (Marshall, 24.1 ov), 4-85 (McCullum, 24.4 ov), 5-91 (Vettori, 28.5 ov), 6-91 (Taylor, 30.3 ov), 7-106 (Oram, 35.1 ov), 8-114 (Mills, 40.4 ov), 9-114 (O'Brien, 41.2 ov)
RJ Sidebottom 12.2-5-26-2-2.10
JM Anderson 8-1-21-1-2.62
MS Panesar 17-5-37-6-2.17
SCJ Broad 4-0-19-0-4.75
ENGLAND, 2nd innings:
AJ Strauss not out 27
AN Cook c Marshall b Vettori 28
MP Vaughan not out 12
EXTRAS: (b 4, lb 2, nb 3) 9
TOTAL: (1 wicket; 27 overs) 76
To bat KP Pietersen, IR Bell, PD Collingwood, TR Ambrose, SCJ Broad, RJ Sidebottom, MS Panesar, JM Anderson
Fall of wickets1-60 (Cook, 20.5 ov)
CS Martin 4-1-8-0-2.00 (1nb)
KD Mills 6-0-17-0-2.83 (2nb)
DL Vettori 10-2-32-1-3.20
IE O'Brien 6-1-9-0-1.50
JM How 1-0-4-0-4.00
Umpires DB Hair (Australia) and SJA Taufel (Australia) TV umpire IJ Gould Match referee RS Madugalle (Sri Lanka)
Reserve umpire NL Bainton.