Maryland (20-9) trailed for most of the last five minutes and fell behind, 73-72, when Aaron Coombs -- a 42 percent free-throw shooter -- made two foul shots with five seconds remaining.
North Carolina-Wilmington used its final timeout, enabling the defending champions to set up a final play. Nicholas took the inbounds pass, dribbled the length of the court, pulled up on the right wing, and hit his fifth three-pointer of the game.
"I just took it as far as I could and I just tried to make something happen," Nicholas said. "I know the shot didn't look like the prettiest, (but) it went in, and I really couldn't believe that it went down. There's nothing better. In front of 20,000 fans, NCAA tournament? It can't get better."
"I was praying, 'Please let it go in, please let it go in,'" said point guard Steve Blake. "It seemed like that shot was in the air forever."
"It seemed like it was in the air for about ten seconds," said star UNC-Wilmington guard Brett Blizzard, who had an off night, but scored 10 of his 15 points in the final 6:09. "There's really nothing you can say. It's just one of those things that happens."
Nicholas, the 6-3 senior, who backed up Juan Dixon on last season's title team, kept on running into the locker room, but had to be coaxed back while officials reviewed videotapes to see if the shot beat the buzzer.
The replay showed Nicholas released the ball with a half second remaining on the clock.
"That will always be special for me," said Maryland Coach Gary Williams. "It's not easy to do that when you're not playing particularly well. We have heart. I hope nobody questioned our heart the last two games."
Nicholas scored 22 points and Ryan Randle added 15 and 16 rebounds for the Terrapins, who reached the 20-win mark for the seventh straight season. They will face third seed Xavier in the second round on Sunday.
It was a heartbreaking loss for the Seahawks (24-7), who were a moment away from their second straight first-round upset. They shocked Southern California as a 13th seed a year ago.
"Five seconds is an eternity in basketball," said North Carolina-Wilmington Coach Brad Brownell. "We did everything we could. Give credit to Drew Nicholas. He made the game-winner."
Freshman guard John Goldsberry tied an NCAA Tournament record by making all eight of his three-point attempts and led all scorers with 26 points.
"It is hard to go out on a last-second shot," Goldsberry said. "You'd almost rather get blown out."
Despite being the higher-seeded team, Maryland wore its road red uniforms because three players' jerseys had been misplaced at the team hotel. A team official said they might have been stolen.
The Terps next play third-seeded Xavier in the second round on Sunday. The Muskateers (26-5) mowed down Troy State, 71-59.