Hosts Valencia fought their way back from Oscar Duarte's opening goal for fourth from bottom Espanyol with strikes from Alvaro Negredo and Denis Cheryshev in the final 19 minutes.
"The fans were amazing, above all when we went behind they stuck with us," said former England and Manchester United defender Neville.
"When Espanyol scored we responded with better play and that's because of how the fans supported the team. We knew that it was going to be a night of emotion."
Earlier, second-placed Real made a blistering start and Ronaldo netted after three minutes, surging into the box from the left, cutting inside Xabier Etxeita and beating Gorka Iraizoz for his 15th goal in 14 matches.
Bilbao hit back with a string of counter-attacks and were on level terms seven minutes later when midfielder Javi Eraso pounced on a poor back pass from Raphael Varane.
James restored Real's lead in the 37th minute with a ferocious shot from the edge of the edge of the box and they led by two goals at halftime after Toni Kroos scored from Ronaldo's pass in added time.
"We missed a great opportunity because we could have won," Bilbao coach Ernesto Valverde told reporters.
"We were guilty of naivete with their third goal. The result shows that even if you do a lot (Real) have good finishing. That made the difference."
The home side had Varane harshly sent off for a second booking after he elbowed striker Aritz Aduriz for the second time in the match while going for a high ball in the 83rd minute.
FIRST RED CARD
It was the first-ever red card for the 22-year-old France defender nicknamed 'Mr Clean'.
Ronaldo grabbed his 21st league goal of the season, and 16th of his career against Bilbao, in the 87th minute. The Basque side then pulled one back with substitute Gorka Elustondo's header in added time.
Real have 53 points from 24 matches, one behind leaders Barcelona who have two games in hand and host Celta Vigo on Sunday.
Atletico Madrid, two points adrift of Real in third spot, visit Getafe on Sunday.
Neville celebrated his first win in 10 La Liga matches in charge after substitute Negredo equalised in the 71st minute and Cheryshev, on loan from Real Madrid, headed the winner five minutes later.
"We have to thank the fans for cheering us on from the very beginning," said Cheryshev. "It was breathtaking."
Valencia are 11th with 28 points. Espanyol, without a win in eight matches under Constantin Galca, remain one place and one point above the relegation zone with the Romanian's job hanging by a thread.
Villarreal consolidated their hold on fourth place with a 1-0 home win over Malaga courtesy of Roberto Soldado's first- half goal.
They are 11 points ahead of Sevilla, who are at home to Las Palmas on Sunday, and 13 in front of sixth-placed Bilbao.
In the late match, ninth-placed Deportivo La Coruna drew 2-2 at home to Real Betis who are 14th.
(Writing by Rex Gowar; editing by Clare Fallon)
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