World champion Thor Hushovd outsmarted Edvald Boasson Hagen to surge past the Team Sky rider and take his second stage win in the 2011 Tour de France.
Hushovd timed his burst to perfection to leave his fellow Norwegian behind in the final metres at the finish in Gap.
Frenchman Thomas Voeckler retained the yellow jersey, but Australian Cadel Evans and three-time winner Alberto Contador both made significant gains.
Mark Cavendish stays top of the sprint standings with a lead of 34 points.
After a cagey opening, the stage came to life as the peloton took on the slopes of the Col de Manse, the stage's only category two climb.
A 10-man breakaway group, without any of the general classification contenders, was strung out as Cervelo-Garmin's Ryder Hedjedal reeled in Russian rider Mikhail Ignatyev to reach the summit with team-mate Hushovd and Boasson Hagen a short distance behind.
The trio came together with two kilometres to go and the Cevelo-Garmin colleagues took turns to attack before Hushovd pounced in sight of the line, with an outnumbered Boasson Hagen unable to respond.
Further back Contador looked back to his bullying best and apparently recovered from the knee injury that hampered him earlier in the Tour.
The Spaniard made several attempts to pull away as the gradient increased, and although Voeckler initially covered his breaks, the pressure told.
Contador broke free of the race's overall leader, as well as brothers Andy and Frank Schleck, with only Evans and Samuel Sanchez able to to follow.
Evans held his nerve best on the tricky descent to La Rochette and by the time he crossed the line had moved into second place ahead of Frank Schleck in the overall standings and within one minute 45 seconds of Voekler.
Contador, who was caught up in a pile-up on the race's opening stage, nibbled 18 seconds off the four-minute deficit between himself and the yellow jersey.
Andy Schleck, especially, struggled on the final downhill stretch and an advantage of one minute 45 seconds over Contador was reduced to less than 40 seconds.
"It's a little bit scary when Contador attacks," admitted Voeckler.
"With the kick he has in the climbs, I probably should have left the others chase but it's not my style.
"We didn't expect him to attack today, rather in the next few days and I must admit I got stuck, but most of the others struggled too. I should have stayed in Evans's wheel."
The race's decisive stages are expected to come over the next three gruelling days in the Alps, with Voeckler himself having openly admitted he is not confident of retaining the lead until the finish in Paris.
At 2,645m, Thursday's finish at Galibier Serre-Chevalier is the highest in the race's history before the riders ascend the Galibier again the following day en route to Alpe d'Huez.
STAGE 16 RESULT
1. Thor Hushovd (Nor/Team Garmin-Cervelo) 3hrs 31mins 38secs
2 Edvald Boasson Hagen (Nor/Team Sky) same time
3 Ryder Hesjedal (Can/Team Garmin-Cervelo) at 0:02
4 Tony Martin (Ger/HTC-Highroad) at 0:38
5 Mikhail Ignatyev (Rus/Katusha Team) at 0:52
6 Alan Perez Lezaun (Spa/Euskaltel-Euskadi) at 1:25
7 Jeremy Roy (Fra/FDJ) at same time
8 Marco Marcato (Ita/Vacansoleil-DCM) at 1:55
9 Dries Devenyns (Bel/Quickstep Cycling) at same time
10 Andriy Grivko (Ukr/Astana) at 1:58
1. Thomas Voeckler (France/Europcar) 65 hrs 24 mins 34 secs
2. Cadel Evans (Australia / BMC Racing) +1.45
3. Frank Schleck (Luxembourg / Leopard) +1:49
4. Andy Schleck (Luxembourg / Leopard) +3:03
5. Samuel Sanchez (Spain / Euskaltel) +3:26
6. Alberto Contador (Spain / Saxo Bank) +3:42
7. Ivan Basso (Italy / Liquigas) +3:49
8. Damiano Cunego (Italy / Lampre) +4:01
9. Tom Danielson (U.S. / Garmin) +6:04
10. Rigoberto Uran (Colombia / Team Sky) +7:55