World No.4 Sinner triumphed 7-5 6-7 (5-7) 7-6 (7-2) in a match spanning more than three hours on Tuesday night and into Wednesday morning.
It was the 22-year-old Italian's first win in their four head-to-head meetings and it also ended Djokovic's 19-match winning streak that stretched back to his five-set loss to Carlos Alcaraz in the Wimbledon final.
Sinner, 14 years Djokovic's junior, wrapped up victory over the 24-time grand slam champion with a smash - prompting deafening roars from the sell-out crowd at the Pala Alpitour.
"There doesn't exist a better place to beat the world No.1," Sinner said in his on-court interview, which was interrupted by the crowd serenading him with "Olé, Olé, Olé Olé, Sin-ner, Sin-ner."
"After Wimbledon I said I felt a bit closer but I didn't even win a set.
"Here I managed to play the most important points in the best way. There was a bit of tension when I lost the second set, it was very hard, but together with you (the crowd) we won together."
He moves top of the group, although he is not yet guaranteed a semi-final spot ahead of his final round-robin match against Denmark's Holger Rune on Thursday.
Sinner didn't make it out of the group stage in his only other appearance at the ATP Finals, as an alternate in 2021.
Stefanos Tsitsipas (r) failed to finish the first set against Holger Rune (l) due to a back injury.
Earlier, Stefanos Tsitsipas retired with a back injury after just three games of his match against Rune.
Tsitsipas, the 2019 champion, was trailing 2-1 in the opening set when he had a lengthy conversation with his trainer before slowly getting to his feet, shaking his head and walking over to shake Rune's hand.
That was after just 17 minutes of play and led to a chorus of jeers and whistles from the disappointed crowd — which instead had to settle for an exhibition match between alternates Taylor Fritz and Hubert Hurkacz.
"My apologies to all the fans and the crowd that came to support me today and watch the match," said the Greek, who lost to Sinner 6-4 6-4 on Sunday.
"I'm really gutted that I wasn't able to finish the match ... Unfortunately, I felt terrible on the court. I did what I could do in the best possible way to be ready and fit for this match, but it didn't work out for me.
"It kills me not to be able to finish this tournament, the one that I've prepped for for so long."
It counts as a first victory at the tournament for 20-year-old Rune, who was edged out by Djokovic in his opening match.
With PA & Reuters.
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