Before this, Croatia's best finish was third place in France 1998, its first-ever World Cup appearance.
"We deserved the victory", said match-winner Mandzukic. His free-kick was curled perfectly into the net from 25m out, leaving Danijel Subasic comprehensively beaten.
Hard to believe at the time, but that would be England's only score.
Croatia, in their first semi since 1998, levelled through Ivan Perisic after 68 minutes and then looked the more risky side.
Ivan Perisic equalised for Croatia after 70 minutes to force extra-time, and a goal from Mario Mandzukic at 109 minutes ended the Three Lions' hopes.
As the extra period started Croatia struggled to maintain their intense pressure but continued to threaten the England defense.
England will play in a World Cup semi-final for the first time since Italia 90, but Southgate insists his life outside of the game will not change if England progress to the final, or even win the tournament.
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Photos taken by Yuri Cortez after Croatia players buried him in celebration
MOSCOW-One of the most notorious dives in soccer history took place the last time France played Croatia in the World Cup . Asked about facing France , Dalic, the former Al Ain manager, said: "There is no weakness in a team that is in the final".
Talk about the potential rule loophole started after Portugal's Jose Fonte strangely chose to stay in the field of play while the rest of his team celebrated Cristiano Ronaldo's equaliser against Spain off the pitch.
"It hurts, it hurts a lot". It's been a fantastic journey.
He added: "We know we have done everybody proud but we wanted to go on and win it, [so] we have fallen a bit short. But now it's got a good foundation, so we just need to build on that and make sure we build an empire from it".
"All these words from them we take, we were reading and we were saying, "OK, today we will see who will be tired".
In delirious scenes in Paris, fans let off fire crackers and released smoke flares.
England looked at their best and most threatening when Sterling was zipping around up front, yet they struggled to get him involved in the second half as Croatia's all-star midfield belatedly took control of proceedings.
There are plenty of big names ahead of England in the betting though, albeit many of them failed to produce this summer with one notable exception.
Moments later, the final whistle was blown and Croatia won the match 2-1, booking its passage to the final against France on Sunday.
With such a youthful squad taking part in Russian Federation, there is clearly a hope that Wednesday's semi-final defeat won't be the last time that this group of players contest the latter stages of a major tournament.