For the first time since 2004, neither Djokovic nor the injured Rafa Nadal will be in the Rome final.
Rune outlasted Djokovic in three sets in last year's Paris Masters final and the Dane got off to the perfect start in search of another upset by breaking the world number one in the opening game of the match.
The seventh seed showcased his aggressive style and mixed up his game with some delicate drops to race ahead 4-1 as Djokovic looked uncomfortable in between points having admitted a day earlier that he was dealing with a physical issue.
Rune squandered a late breakpoint opportunity but the fast-fading Djokovic could not prevent him from closing out the first set as some sections of the crowd appeared to be in disbelief over the six-time champion's struggles.
Djokovic took a painkiller midway through the second set and he roared back to life a short while later to go up 5-2 following a break and a hold, as Rune completely lost his cool over a line call by the chair umpire.
Rune, who launched an expletive-laden rant while receiving treatment for a right leg problem, responded with a break of his own but went on to surrender the set following a lengthy break in play due to rain.
Ferocious hitting from both players marked the start of the decider but a dominant Rune pounced on Djokovic's serve en route to a 4-0 lead and completed a famous win on his own delivery in a rare spell of sunshine.
"It's really a big win for me," Rune said. "Obviously, I did it last year in Paris, but every match is a huge challenge when I play Novak.
"He's one of the greatest to ever play the game so I knew I had to be at my best. I'm super proud of myself and I enjoyed every moment out there."
Rune said he hoped to stay humble after another statement win on the ATP Tour.
"I have a lot to achieve... I think I'm humble and I hope people see me this way.
"I'm a huge fighter on court and I leave everything out there. Huge credit to Novak, he's an inspiration."
Djokovic will relinquish the top ranking to Spaniard Carlos Alcaraz before the May 28th-June 11th French Open, where the Serbian will look to claim a men's record 23rd Grand Slam title having gone level with Nadal by winning the Australian Open.
Rune will next face French Open runner-up Casper Ruud, who beat Francisco Cerundolo in the last of the men's quarter-finals later on Wednesday. The Norwegian won the match 7-6(5), 6-4.
In the women's draw, Jelena Ostapenko defeated Paula Badosa to claim a place in the semi-finals. The match finished 6-2, 4-6, 6-3.
The 2017 French Open winner will face seventh seed Elena Rybakina for a spot in the final after world number one Iga Swiatek retired from their semi-final with an injury.
The two-time defending champion requested a medical timeout after Rybakina came from behind to take the second set in a tiebreak and the Polish top seed, who returned with her leg taped up, withdrew with the third set level at 2-2.
