Real Madrid squandered the opportunity to extend their gap over Barcelona at the top of the La Liga table on Wednesday night, losing only their second league game of the season at Valencia despite dominating at the Mestalla Stadium.
January signing Simone Zaza scored in his second successive game before fellow loanee Fabián Orellana, who also only joined last month, made it 2-0 to the hosts after just nine minutes.
Cristiano Ronaldo marked his 700th club career appearance with a superb header - his 15th La Liga goal of the current campaign - before half-time to put Madrid back in the tie.
But despite spending much of the second 45 minutes in Valencia's half, they could not translate their dominance into goals as Los Che claimed only a second win over Madrid in their last 16 meetings in all competitions.
Defeat leaves Real a point ahead of rivals Barcelona, with one game in hand, while Valencia climb 10 points ahead of the drop zone as they further distance themselves from danger.
Zidane fields strong Madrid side
Madrid made seven changes from the weekend's win over Espanyol, although Gareth Bale - who scored in that victory at the Santiago Bernabéu Stadium - remained on the bench.
Keylor Navas, Marcelo and Sergio Ramos returned in defence while Casemiro, Luka Modrić, James Rodríguez and Karim Benzema all made their returns in a near full-strength eleven.
Valencia boss Voro made only two changes as he switched to a back-three system with wing-backs, João Cancelo and José Gayá replacing Martín Montoya and Guilherme Siqueira.
Elsewhere the home team stuck with the same side that beat Athletic Bilbao to climb to give them a comfortable seven-point cushion ahead of the La Liga relegation zone.
Valencia two up inside only nine minutes
With this one of two games Madrid have in hand over second-placed Barcelona due to their Club World Cup participation at the end of 2016, they dominated early on as they looked to open up a four point advantage at the summit of the table.
Yet in Valencia's first attack, on-loan striker Zaza - having netted his first goal against Bilbao - opened the scoring after five minutes with a sensational strike.
Receiving the ball with his back to goal, former West Ham United frontman Zaza controlled well and in one movement, spun goalwards to fire a fierce dipping volley from 15 yards which Navas could only watch find the top corner to send the Mestalla into raptures.
And despite all of the play before the opening goal having been in Valencia's half, Voro's side doubled their advantage on just nine minutes.
A quick counter-attack saw Zaza find Nani to his left, the former Manchester United winger looking to his right to find Orellana. Driving into the box, the Celta Vigo loanee took one touch before coolly slotting an effort through the legs of Navas.
Munir El Haddadi almost added a quick-fire third as Valencia's confidence surged, but Marcelo was on hand to stand in the way of the winger's side-footed shot from Gayá's cross on 13 minutes.
Madrid sought a quick response and Ronaldo fired into the side-netting from distance before Rodríguez saw an attempt cleared off the line from the Portuguese's cross.
Los Blancos continued to apply pressure and, finding themselves 2-0 down in a league game for the first time since last April, Diego Alves was required to push Benzema's 25-yard strike bound for the top corner over his crossbar.
Navas, likewise, was made to dive high to his right to keep out Dani Parejo's curling free-kick which threatened to put the game beyond Zinedine Zidane's away side.
Ronaldo header offers Real a lifeline
Valencia, packing numbers behind the ball in their well-drilled 3-5-2 formation and countering with pace, continued to look comfortable with all of Madrid's in front of their back-line.
The home side's momentum was dealt a blow on 38 minutes when Nani was forced off with an apparent groin injury, Siqueira replacing him at left-back as Los Che switched formation.
And shortly after, Ronaldo landed another punch to reduce the deficit to one, meeting Marcelo's cross to power an emphatic header past Alves and offer his side hope before the break.
That, incredibly, was Ronaldo's 51st headed goal in the last 10 seasons - making him the most prolific player in the air of anyone in Europe's top-five leagues in that time.
The 32-year-old almost added a second seconds later, but on-loan defender Eliaquim Mangala's vital deflection took his powerful drive beyond Alves' post.
Madrid struggle to test Diego Alves despite dominance of the ball
Off the back of that goal, Real Madrid came flying out of the blocks in the second-half - Marcelo's shot blocked from Benzema's cut-back at the by-line.
To combat Madrid's incessant pressure, Voro replaced goalscorer Orellana with 20-year-old midfielder Carlos Soler only 11 minutes into the second-half.
Yet an equaliser seemed inevitable as the away side continued to enjoy almost all of the possession, and having only won five of the 10 games that they scored first in this term - Valencia dropped increasingly deeper.
Their first attack beyond the break didn't come until the 59th minute but Parejo's tame free-kick delivery, before the skipper made amends with a dazzling dribble into the box which forced a spreading Navas off his line to push wide.
As they looked to turn the screw, Bale made just his second appearance since November in his continued return from an ankle injury - replacing Rodríguez.
Tempers began to flare when Valencia felt aggrieved not to have won a penalty after Carvajal shoved Zaza off the ball when he looked to take a bouncing ball beyond Navas, following Raphaël Varane's error, before Mangala swiped Carvajal.
And Valencia were unfortunate not to have been awarded a penalty when Ramos trod down on Munir's foot on the 18-yard box line.
Both sides made a raft of substitutions, Lucas Vázquez coming on for Modrić as Madrid looked to inject some extra attacking impetus yet they struggled to make an impact, Bale quelled by Gayá while they relinquished their control in the centre of the pitch with so many forwards on the pitch.
Madrid had a few late chances, Bale's downwards header from a corner seemingly goalbound before Pérez's intervention but Valencia survived the late scrambles to edge a thrilling affair.
That meant that for the first time this season, Zidane's front-runners failed to produce a response to conceding first as they suffered a second defeat of the season after January's reverse to Sevilla.
They can still move four points clear if they win their game in hand, though they face a tricky trip to Villarreal next time out as Valencia visit Alavés.