The loss took England's chances of qualifying out of its hands. It will probably need to beat Group D leader Croatia in their final game on Nov. 21 and hope Russia doesn't win both of its final two games on the road against Andorra and Israel.
England was 1-0 up at the Luzhniki Stadium in the 69th minute when Wayne Rooney, scorer of the England goal, was called for a dubious penalty awarded by Spaniard Luis Medina Cantalejo for a tug on Konstantin Zyrianov that appeared to take place outside the penalty area.
Roman Pavlyuchenko converted the penalty kick and then scored again four minutes later to leave England facing elimination.
"We were in control and never looked in any danger," a stunned England coach Steve McClaren said. "It was in our grasp and we've ended up losing it. I've just seen the penalty again and it's an absolute disgrace."
McClaren insisted the foul was outside the area.
"It was five minutes of madness that cost us the game but there are 12 games in this group, not 11," McClaren added. "I am very disappointed, the players are devastated, our fate is out of our hands now but it's not over yet."
Scotland was rolling after wins over France and Ukraine, but it lost at Georgia, 2-0, on goals by 17-year-old Levan Mchedlidze, who plays for Serie A's Empoli, and David Siradze and dropped to second place behind France in Group B.
The Scots will probably need to beat Italy on Nov. 17 to have any chance of qualifying.