A Jason Roberts volley, Laurent Koscielny's own goal, Mikele Leigertwood's strike and Noel Hunt's header inside the opening 37 minutes at the Madejski Stadium appeared to be sending former Gunner Brian McDermott's Reading into the quarter-finals of the Capital One Cup.
But a truly astonishing Arsenal turnaround came as Walcott started and finished, with the final kick of normal time, a stunning fightback at 4-4 with goals either side of headers from substitute Olivier Giroud and Koscielny.
Forgotten man Marouane Chamakh then looked like he had won the tie in extra time but, with the additional half-an-hour almost complete, Pavel Pogrebnyak delivered yet another grand twist with an equaliser at 5-5.
Reading, though, suffered the final heartbreak as first Walcott and then Chamakh settled the 12-goal epic to leave Wenger looking bemused and McDermott inconsolable in the respective dugouts.
It appeared as if it was going to be a most recent stumble from Arsenal, who have been trophyless for seven years, after a nervy win over Queens Park Rangers in the Premier League on Saturday had seemingly only papered over their cracked confidence of defeats by Norwich City and Schalke and a controversial AGM.
It was an explosive start, which should have offered a clue of what was to come, and soon Arsenal were behind as Roberts shook off his marker, Koscielny, inside the six-yard box to slide and meet Hal Robson-Kanu's 12th minute cross.
Wenger's team were rocking as they continued to make a wretched, error-strewn beginning and they found themselves two goals down in the 18th minute, when Koscielny's nightmare first half continued by poking a Garath McCleary cross into his own net.
Things were to get worse for the visitors just two minutes later, with Chamakh, who was making his first start for Arsenal since January among 11 first-team changes, giving the ball away and goalkeeper Damian Martinez making a mess of Leigertwood's soft shot.
But still Arsenal's first-half misery was not complete and in the 38th minute, from another McCleary cross, Hunt's header made it 4-0 to leave some visiting fans seemingly heading for the exits.
Arsenal, though, rescued some hope on the stroke of half-time, when Walcott dinked a finish over Adam Federici and the goal proved to be a turning point in a historic night which saw Wenger's unchanged 11 players emerge for the second half as if they were a different team.
In the 62nd minute, Giroud entered the fray and instantly added to the impetus by expertly heading into the back of the net just two minutes later as Reading began to show the nerves of a squad who sit without a win in the Premier League relegation zone.
Koscielny's 89th minute header from a corner then had McDermott's side really twitching at 4-3 and it proved too much for them to handle, with Walcott scrambling an effort just over the line with the last kick of six minutes added time to set up an extra half-an-hour.
Extra time was therefore required after a quite sensational and, given Arsenal's ineptitude in the first half, totally unpredicted comeback, which gave the visitors the momentum at a time when Reading, who have never beaten their London opponents in any competition, were crumbling.
In the 103rd minute, Chamakh proved to be one of the heroes when hitting an effort from range past the despairing Federici but Pogrebnyak's 116th minute header seemingly set up a penalty shoot-out.
Arsenal had other ideas and Walcott ensured he would keep the match-ball when finishing a Koscielny and Andrey Arshavin-led counter-attack before Chamakh ended any doubts by lobbing in the final goal of the night to secure a breathless 7-5 result.