World number four Sinner needed a straight-sets victory in front of enthusiastic home support in Turin over tennis icon Djokovic to guarantee passage from the Green Group with a match to spare.
And while he couldn't quite make that happen, a superb performance gave him his first win in four attempts over Djokovic, who is bidding to win for a record seventh time at the year-ending tournament.
"It means a lot to me," said Sinner on court.
"When you win against the world number one who has won 24 Grand Slams it's obviously in the top-top."
Fans made an almighty din for Sinner, chanting his name to the rafters once he claimed victory in an exciting, three-hour contest which ran way past midnight at the Pala Alpitour.
Sinner has had the best year of his career and looks be fulfilling the promise he has long shown, winning four titles this season including the Toronto Masters, and looks on form in Italy.
He made the first breakthrough when he capitalised on Djokovic handing him advantage in game 11 with a double fault, moving 6-5 ahead with a big backhand before claiming the set with a service game to love.
Djokovic pulled level after a bruising second set in which neither player faced a single break point, but after fighting back from 4-2 down in the decider he wilted in the tie-break and ended his winning run at 20 matches.
Both players' fate will be decided in the final round of group matches, with Djokovic facing Hubert Hurkacz who has stepped in for Stefanos Tsitsipas after the Greek pulled out of the tournament with a back injury against Sinner's next opponent Holger Rune.
And Rune will have the benefit of having played just three games before being awared a straight-set win.
Tsitsipas out
Tsitsipas was trailing the opening set of his match with Finals debutant Rune 2-1 when he was forced to quit, handing his opponent his first ever win in the tournament.
The sixth seed was loudly booed by the crowd who saw barely a quarter of an hour of singles play in the afternoon session, fans angered by him playing despite persistent rumours of injury.
"I'm gutted that I wasn't able to finish the match," Tsitsipas told reporters.
"My doctors and the countless visits that I had in the last few days suggested that I play... Unfortunately I felt terrible on the court. I did what I could do in best possible way to be ready and fit for this match, But it didn't work out for me."
Tsitsipas said after pulling out that he had felt problems during his warm up and that once on the court he felt too much pain to complete the match.
"I've gone through pain during matches in the past... But this was clearly too much to handle and I had to take the difficult decision to do what I did," he said.
Tsitsipas also hinted that a "lack of rest" in a packed schedule could have contributed to him having to drop out.
The ATP has come under fire from players and coaches for scheduling which often leads to late-night matches and short recovery times during tournaments.
On Wednesday world number two Carlos Alcaraz will try to get his Red Group campaign up and running against Andrey Rublev, while Daniil Medvedev eyes a spot in the last four in his clash with Alexander Zverev.
