Steelers were hit by a seven-minute, first-period whirlwind of goals - fought back admirably but still have a mountain to climb to reach the Play Off semi final.
A first period collapse, then a goal conceded with 10 seconds to go, means Steelers face being kicked out of the Play Offs at quarter final stage for the second year running.
The result is every bit as disappointing at losing the Challenge Cup final at Cardiff Devils.
And the club’s coach admitted his side was capable of brilliance or rubbish, on any given night.
Sheffield went behind when Alex Nikiforuk finished off a move featuring a drop pass from Panthers most prolific player Stephen Schultz at 4:55.
With d-man Zack Fitzgerald in the box for cross checking, Robert Farmer made it two at 8;54.
Then came a seemingly-devastating two goals blast came in 48 seconds from Panthers, who were clearly relishing the role as the underdogs in two-game series.
Brad Moran cashed in on a Andreas Valdix charging penalty to pot a rebound and Brian McGrattan added another unassisted. 11:52 in the first-leg game.
Nottingham were two for two in power play strikes.
Panthers’ own top penalty taker Brian McGrattan’s elaborate celebration suggested Corey Neilson’s team were in heaven.
While Sheffield coach Paul Thompson was beside himself with anger - later calling the first period “abysmal” and questioning the attitude of his players.
Stelers went on to dominate the next 40 minutes.
Less than five minutes into the middle period, Levi Nelson scored past goalie Miika Wiikman on the Power Play following a Schultz slashing call and creative work from Robert Dowd.
Wiikman came under increasing pressure as Sheffield tried to reduce the deficit, with Colton Fretter and Mathieu Roy trying to get the better of him.
But Steelers trooped in at the second interval 4-1 down, despite outshooting their hosts 16-3 in the middle 20 minutes.
Sheffield could not afford to concede any more.
And they had Ervins Mustukovs to thank for halting Jason Williams one on one.
But Steelers scored their second of the evening when Geoff Walker scored on the PP from Ben O’Connor and Mathieu Roy) at 54:45.
Nottingham now had to use every defensive instinct in their armoury to keep out the South Yorkshire side.
But they had a stroke of fortune - one that could be critical- when Chris Lawrence punished a Jace Coyle turnover at 59:50.
Panthers did not deserve a three-goal first leg margin, perhaps.
But they have it and Steelers will need a Sunday night, season-best performance to advance, now.
Thompson said it was possible to win, despite trailing by three goals.
But whether they do that or not, heads will eventually roll after the abject early showing.
“This is going to affect people going forward” said the coach.
“You don’t know what you are going to get from this team, brilliance or rubbish.”