In torrential rain in northern Italy, Wiggins was distanced on a descent 40km from the finish of the short 134km stage to Treviso. The 2012 Tour de France winner was paced by his Sky team-mates but finished 3mins and 17secs down on stage winner Cavendish to drop outside the top 10 on GC.
Wiggins now lies in 13th place more than five minutes down on Italian race leader Vincenzo Nibali of Astana, and was replaced as Sky's team leader by Colombian Rigoberto Uran.
Cavendish's landmark victory may not have been his prettiest but it was certainly one of his easiest.
After some expert work by his Omega Pharma-Quick Step team-mates, the 27-year-old took a fairly straightforward sprint win over French national champion Nacer Bouhanni (FDJ) to complete a century of professional scalps as the world's best sprinter.
It was Cavendish's third win in the race after victories in stage one and six - and saw the Manxman back into the red points jersey.
Despite the ease with which Cavendish eased past his rivals in the closing straight, it was not all plain sailing for his team - not least because of the relentless rain that poured throughout the stage.
The day's break of five riders were not swept up until the final 300 metres of racing - and Omega Pharma-Quick Step were the only team consistently leading the chase from within the peloton.
Cavendish was quick to praise his team-mates as he passed a significant personal landmark of 100 wins.
"It was my 100th win and what a beautiful way to do it with the guys. I'm so proud," said Cavendish.
"They were unbelievable today - from kilometre zero riding on the front. We left it right to the end. It was a minute gap with 10km to go. Cannondale came to help but it was mainly us.
"Julien Vermote was unbelievably strong. Then Matteo Trentin took over before Gert Steegmans kept me in the right position and lead me out at just the right moment."
Cavendish took the spoils while Bouhanni powered past Slovenian Luka Mezgec of Argos-Shimano to take second place.
Bouhanni was involved in an incident inside the closing 200m when he caused Italian sprinter Sacha Modole (Bardiani Valvole) to veer off line and concede his place in the sprint. Although there was no apparent intention of foul play, such incidents are beginning to crop up with alarming regularity in the close proximity of the French former boxer during bunch sprints.
Maglia rosa Nibali finished safely in the peloton to retain his 41-second lead over Australian veteran Cadel Evans (BMC).
With the ill and out-of-sorts Wiggins now 5:22 down on Nibali, the Italian's main threat in the high mountains could well be Wiggins's Sky team-mate, Uran. The Colombian has since been promoted to team leader.
Along with compatriot Sergio Henao, stage 10 winner Uran was exempt from supporting Wiggins during the dramas of stage 12 and he stays 2:04 down on Nibali in third place on GC.
Dutchman Robert Gesink (Blanco) is fifth at 2:12, one second faster than fifth place Michale Scarponi (Lampre-Merida).
Thursday's stage 12 may have been the shortest so far of the 96th edition of La Corsa Rosa but it was certainly one of the hardest.
In conditions that resembled a monsoon more than a bicycle race, a break of five riders formed off the front on the undulating opening section of the stage.
Fabio Felline (Androni-Giocattoli), Maxim Belkov (Katusha), Bert De Backer (Argos Shimano), Maurits Lammertink and Marco Marcato (both Vacansoleil-DCM) braved the elements to build up a maximum lead of three minutes over the peloton.
But the horrific conditions were made all too apparent when four of the five escapees all hit the deck on an early descent after stage nine winner Belkov slid on the slippery tarmac to spark a domino effect of sprawling riders.
Only Belgian De Backer managed to avoid coming to grief - and news of the incident soon filtered down to the peloton who eased their pursuit with around 100km left to ride.
Already Wiggins was struggling - the 33-year-old riding at the back and clearly suffering the lingering effects of the cold and chest infection he picked up in the opening 10 days of the race.
Two fourth-category climbs had very little effect on the composition of both the leading group and the main pack - but it was the gradual but long descent of the last climb, 40km from the finish, which hammered the nail in the coffin of Wiggins's Giro.
Numerous groups formed as the peloton split under the pressure of Omega Pharma-Quick Step - and the Italian veteran Scaponi, winner of the 2011 edition of the race, was stuck in no-mans-land at one point.
But where Scarponi succeeded on fighting back, Wiggins failed. Supported by six Sky team-mates, Wiggins managed to close the gap to around one minute before suffering from a second wave of weakness.
Soon Wiggins was off the back and isolated - and it was not until team-mate Christian Knees came back that he found his way back into the fold. But at this point, the chasing group was more than three minutes down on the main pack.
With OPQS setting a fast pace in pursuit of the five-man break, the gap grew to in excess of three minutes as Sky - minus Uran and Henao - tried to recapture their winning team time trial form and reduce the deficit.
But it was all in vain. As Cavendish was celebrating his century of wins, former Sky team-mate Wiggins was still driving to the line, his Giro aspirations left in complete tatters.
The race continues on Friday with the tough 254km stage 13 from Busseto to Cherasco - a largely flat affair which concludes with a succession of hills including one third-category test 35km from the finish.
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- Vincenzo Nibali