With eight Grand Slam titles between them, the blockbuster duel topped the Day Seven bill, but it ended up lacking the expected fireworks as 14th seed Osaka dominated.
Sabalenka was left screaming in frustration during a 32-minute opening set as her power game misfired.
The second set was more like the contest the packed crowd had expected, but a serene Osaka stayed cool to snap Sabalenka's streak of 21 unbeaten tiebreaks in Grand Slams and claim her biggest win since returning to the Tour in 2024 following the birth of her daughter Shai.
After losing match point, Sabalenka took out her anger on a ball, blasting it way out of the stadium.
Osaka's win not only took her into the quarter-finals of Wimbledon for the first time, but it also blew the draw wide open with the top three seeds all out.
"I think it was a really fun match. I'm really grateful for this. Even if I lost, I would still think it was a great match," Osaka said after her first victory on Centre Court.
"I mean, it's been a long time since I've had so much fun on the court. To do it here, it really means a lot. I lost to her like three times in a row, so that really sucked.
"So I wanted to turn it over."
After third-round defeats for defending champion Iga Swiatek and second seed Elena Rybakina on Saturday, the door had finally swung wide open for Sabalenka after three successive semi-final runs, but she was well below her best.
"Now I want to go and get drunk and forget about tennis," the 28-year-old said after arriving at her press conference minutes after walking off court.
Both players are better known as hardcourt specialists, with four Grand Slams apiece on that surface.
Born seven months apart, their careers have taken very different trajectories, with Osaka winning all four of her Slams before the slightly younger Sabalenka captured her first.
But they finally met head-on at a Slam for the first time since their first meeting eight years ago when Osaka beat Sabalenka on her way to the US Open title.
Osaka has once again caused a buzz with her Japanese-inspired walk-on outfits, but it is her tennis that is now beginning to really turn heads.
She was first to the punch from the start on Sunday, the quality of her service returns continually catching Sabalenka off balance as she broke twice to take the first set.
Sabalenka tried everything to fire herself up, banging her racket against her head early in the second, but despite keeping pace she rarely looked in control.
Osaka never flinched and sped through the tiebreak to set up a quarter-final with Czech 10th seed Karolina Muchova.