Valenciennes are the sixth top-flight club to be eliminated after holders Lyon, Stade Rennes, Ajaccio, Bastia and Reims all lost at the weekend.
The visitors, who are sixth in the Ligue 1 standings, laboured in the first 90 minutes but looked set to advance when Mathieu Dossevi put them in front in the 75th minute.
However, Istres, who had dominated throughout but lacked a cutting edge, snatched a late equaliser when Sid Ali Yahia-Chrif scored in the 90th to send the match in to added time.
In front of a sparse crowd, the match burst into life as Istres grabbed a deserved two-goal lead thanks to Nassim Akrour, who found the net twice in a minute.
Valenciennes put all their resources into in a late surge and were rewarded by Vincent Aboubakar's superb goal in the 111th minute. Rudy Mater then levelled the the scores three minutes later from the penalty spot to make it 3-3.
Although goalkeeper Nicolas Penneteau, who had been brilliant throughout, put Valenciennes ahead in the penalties shootout with another save, Marco Da Silva and Remi Gomis both missed their efforts and Istres qualified for the last 32.
Last 32 draw:
Fontenay-le-Comte (IV) v Troyes
CA Bastia (III) v Brest
Sedan (II) v Lorient
Plabennec (IV) v Lille
Moulins (IV) v Girondins Bordeaux
Rouen (III) v Olympique Marseille
Meaux (VI) v St Etienne
Nice v Nancy
Epinal (III) v Nantes (II)
Vertou (V) v Evian Thonon Gaillard FC
Raon L'Etape (IV) v Istres (II)
Mende (VII) v Le Havre (II)
Venissieux (V) v Le Poire sur Vie (III)
Paris St Germain v Toulouse
Montpellier v Sochaux
Stade Bordeaux (IV) v Lens (II)
Fixtures to be played on January 22/23.