A one-slam wonder long derided as brittle in the clinches, the 26-year-old Serbian overhauled the raging favourite 4-6 6-3 6-3 in a dazzling display of power hitting that left the Rod Laver Arena crowd thrilled and astonished in equal measure.
Restricted by a back injury and numbed with painkillers, world number one Williams struggled with her movement and was well off her best, but was given no quarter by Ivanovic, who attacked the American's serve with arrogance and closed out the match with barely a hint of nerves.
The greatest player of her generation, Williams has long traded on her aura and a CV boasting 17 grand slam titles, and 14th seed Ivanovic faced a battle to forget her opponent's fearsome reputation and her winless record against her.
"We all know what kind of champion she is," former world number one Ivanovic told reporters after reaching the quarter-finals at Melbourne Park for the first time since 2008, when she eventually lost in the final to Maria Sharapova.
"When we were starting the match and they were talking about all her grand slam titles, it was quite impressive.
"I just stayed in the moment physically. I didn't think much about the occasion and who I was playing, because it can get overwhelming.
"I had to remind myself all the time just to stay in the moment. Because there were moments in the match where it could have gone either way.
"I could have just made few more errors. But I really just believed in my game and stepped up when I needed to.
"I had to break a spell, fourth round, and what's the better place to do it than here against such a champion?"
Having never won a set let alone a match against the American in their four previous career meetings, Ivanovic ended the American's 25-match winning streak that included last year's U.S. Open and a perfect end to the season.
Williams's coach Patrick Mouratoglou revealed the 31-year-old had "blocked" her back during practice before the third round but the American refused to lean on it as an excuse.
"I almost didn't play," she told reporters. "But, hey, I did, and at least I feel good that I tried the best that I could on this day.
"At the end of the day, it's not the end of the world.
"I feel like I'll win (the title) again. Maybe just obviously not this year, but maybe next year."
Famous for her disdain for cooler weather, Williams emerged onto the court like a CEO, wearing a smart tuxedo jacket over her matching pink skirt, but it was Ivanovic who was dictating terms from the outset.
The Serbian earned break points against Williams in the first game and broke the American for only the second time in the tournament at 2-2 in the first set.
Affronted, Williams hit back with a string of sizzling returns and broke her opponent twice to seal the opener after bringing up a second set point with a searing backhand down the line.
Ivanovic shrugged off the setback and stayed true to her gameplan, breaking Williams again at 2-2 in the second.
The Serbian raised huge roars from the terraces by lacing a searing forehand winner, one of 33 for the match, on set point to send the contest to a decider.
Ivanovic marched on, breaking Williams's serve to surge to a 3-0 lead in the third and completed the stunning upset by serving out the match to love.
The Serbian will take on the winner of unheralded Australian Casey Dellacqua and 30th seed Eugenie Bouchard, and has her best chance of reaching the last four of a grand slam since she won the French Open title in 2008.
"Last year, I had few occasions when I was really close to beating top players," said Ivanovic, who made the fourth round of three of the four grand slams last year.
"I'm not afraid of going deep against these top players.
"I'm ready for the battle, and hopefully I can show this game all the way."
- Sports & Recreation