Sanchez, 16, bidding to become the youngest ever winner of America's most-watched TV show, was deemed ahead after performing songs made famous by Whitney Houston and Celine Dion.
But it was acoustic guitar-playing Phillips who brought all three judges to their feet at the end of the performance finale.
"You were perfect tonight, and I think you are the man," said judge Steven Tyler as Phillips closed the show with his potential first single "Home" - a song that mixed the style of folk-rock band Mumford and Sons with Paul Simon and featured a marching band.
Randy Jackson called the Georgia singer's performance "brilliant, genius" and added "Dude I loved the song! I loved you. I loved the production ... Everything about that was perfect."
Phillips, 21, also put his own spin on his two other songs - Billy Joel's "Movin' Out" and the classic "Stand By Me" - earning screams of adulation from the audience of 7,000 in Los Angeles. But he failed to convince the three judges.
"This is a tough one," said Jennifer Lopez. "It's like a battle of the opposites."
"JUST OKAY"
Sanchez, a home-schooled California teen, won praise for her renditions of Whitney Houston's "I Have Nothing" and Celine Dion's "The Prayer."
But her potential first single, a pop ballad called "Change Nothing," fell flat with the judges, bringing tears to the eyes of the young singer.
Jackson thought the song was "just okay" while Tyler said "It didn't feel like the proper song for you to sing."
But the judges' impact is limited to potentially swaying audience votes. America's "Idol" will be chosen by viewers and fans who have four hours to vote by phone, text and online after the show ended on Tuesday. Results will be announced at the end of a star-studded two hour finale Wednesday on Fox television.
Based on social media buzz and Twitter postings going into Tuesday's final, Sanchez had a 17 percent lead in Yahoo! searches, the Internet search engine said.
She also generated 6o percent more mentions in social media than Phillips, according to a survey by analytics company General Sentiment.
But Phillips, whose goofball humor has charmed millions of young female viewers, has never been in "Idol"s bottom three. Sanchez, who is sometimes criticized for failing to connect emotionally with her lyrics, was saved by the judges from elimination in April after coming bottom in the public vote.
The young girl of Mexican and Filipino descent has a thousands of supporters in the Philippines, while Phillips has won sympathy for a kidney problem that has plagued his health during the show. "Pheel Better Phillip" read one poster in Tuesday's audience.
Wednesday's winner will receive a guaranteed recording contract, putting him or her on a potential road to the stardom enjoyed by early champions Kelly Clarkson and Carrie Underwood.
But more recent winners have fared less well and audiences for "American Idol", now in its 11th season, have fallen by 23 percent to an average 19.2 million viewers.
(Reporting by Jill Serjeant; Editing by Bob Tourtellotte)
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