Astana's Aru - who finished third in May's Giro d'Italia - broke clear on the final climb of the 154km stage from Pamplona to take his first Vuelta a Espana win by six slender seconds on the rampaging pack of race favourites.
Movistar's Valverde pipped compatriots Joaquim Rodriguez (Katusha) and the red jersey Contador (Tinkoff-Saxo) for second place and some valuable bonus seconds.
Valverde - now Movistar's main man following the shock withdrawal of Colombia's Nairo Quintana earlier in the stage - now trails Contador by 20 seconds on GC, with Rigoberto Uran (Omega Pharma-Quick Step) in third place at 1:08.
Despite struggling on the final 9.5km climb, Britain's Chris Froome (Team Sky) recovered to take fifth place on the stage, just one second behind his Spanish trio of rivals.
Froome nevertheless rose to fourth place on GC, 1:20 down on Contador, after Colombia's Winner Anacona (Lampre-Merida) faded on the second of two back-to-back ascents that concluded a tough stage in the Basque Country.
Aru's victory saw the Sardinian youngster leapfrog Spain's Samuel Sanchez (BMC) in the overall standings into seventh place, 2:13 off the summit.
"It's incredible - I'm hugely happy. Everything today just went perfectly for me and the team," said 24-year-old Aru. "My main target was the stage win and I'll now take each day as it comes."
Aru was the last in a string of riders to try their luck at breaking clear on the final climb to the Sanctuary of San Miguel at Aralar. A very short-lived attack by Colombian Julian Arredondo (Trek Factory Racing) was followed by a move by French youngster Warren Barguil (Giant-Shimano) and Dutchman Robert Gesink (Belkin).
Gesink quickly dropped Barguil - a double stage winner from last year's race - before opening up a gap of 20 seconds on the select pack of favourites. Ireland's Dan Martin (Garmin-Sharp) and Spaniard Dani Navarro (Cofidis) both tried to reel in Gesink as Froome struggled to keep up with the high pace.
But two kilometres from the finish, Froome refound his climbing legs and the 2013 Tour de France winner returned to the front of the pack with a series of unseated surges. Contador responded with his own acceleration as Navarro, Martin and Gesink were all reeled in.
Aru used another attack by Navarro as a springboard for his decisive move, taking advantage of a lull among the GC favourites to dance clear going under the flamme rouge.
Froome, who had been distanced once again, found his way back on the front to lead the chase - and the yo-yoing Briton continued his topsy-turvy final climb by losing touch in the finale.
QUINTANA WITHDRAWAL: Just 20km into the stage a large crash in the peloton brought down a whole cluster of riders including the man whose acrobatic fall in Tuesday's individual time trial had seen him drop from the race leader to eleventh place.
Quintana, the Colombian winner of the Giro d'Italia, was taken to hospital in Pamplona with a suspected broken collarbone. It was later announced by his Movistar team that the 24-year-old had suffered a broken shoulder blade that would require surgery. Movistar also blamed the crash on a press motorbike belonging to the Spanish newspaper AS - although this was denied by the paper.
Along with Quintana, the crash also brought about the withdrawal of Italy's Steve Morabito (BMC) and Frenchmen Maxim Bouet (Ag2R-La Mondiale) and Thibaut Pinot (FDJ).
DASH FOR BONUS SECONDS: Perhaps emboldened by taking the red jersey, Contador was part of a 30-man break that formed ahead of the first intermediate sprint - only to be reeled in thanks to the work of Katusha and Movistar on the front of the peloton.
Contador tried his luck again at the intermediate sprint at Tafalla but was caught by Valverde, who took the points and three bonus seconds. With Contador taking two bonus seconds for second place, and then conceding six bonus seconds to his rival at the finish, Valverde was able to reduce his deficit to the red jersey by seven seconds.
FIVE-MAN BREAK: After a dramatic opening hour or so, the race finally calmed down when four riders - Pim Ligthart (Lotto-Belisol), Vasil Kiryienka (Team Sky), Elia Favilli (Lampre-Merida) and Johan Le Bon (FDJ) - broke clear of the pack. They were soon joined by Peio Bilbao (Caja Rural) as the five-man break build up a maximum lead of four minutes.
With the gap coming down by the time the race passed through the second intermediate sprint at Estella, Belorussian Kiryienka took matters into his own hands with a trademark solo attack.
Kiryienka started the Cat.3 climb of Puerto de Lizarraga with a two-minute gap over Favilli and Bilbao and almost four minutes over the pack, which had swept up both Le Bon and Ligthart. The Sky rider crested the summit with a lead of 2:30 with 35km remaining.
Once the chasing duo was caught, Kiryienka's gap came tumbling down. He held just 35 seconds going onto the final climb as his Sky team-mates came to the front of the pack to set an infernal pace for their leader Froome.
So fast was the pace, in fact, that Froome himself was distanced: first Philip Deignan, then Dario Cataldo, rode with a hefty tempo that thinned out the main pack quite considerably.
Froome was saved by the combined attack of Barguil and Gesink, and the 29-year-old Sky rider was able to force his way back to the leading group of main favourites. He stayed firmly rooted on the back until a second wind saw him return to the fray with 2km remaining.
But by now Aru was poised to pull off his well-timed coup - leaving the likes of Contador, Rodriguez, Valverde, Froome and Uran to battle it out for the remaining bonus seconds.
RIDE OF THE DAY: Fabio Aru showed maturity beyond his years with his decisive dig just ahead of the final kilometre. What a prospect the Italian is turning into.
Astana's Italian cyclist Fabio Aru celebrates winning on the podium after the 11th stage (AFP)
DAY TO FORGET: A second crash in as many days was enough to see Nairo Quintana's race - and perhaps season - come to an end. The prospect of seeing the Colombian go all-out in the mountains to close his 3:25 deficit on the race summit was as mouthwatering as the expected team leadership tussle with Valverde.
But just like Froome two months earlier, Quintana followed up an entirely unnecessary crash with a worse, much more serious crash - and like the Briton's Tour hopes in July, the Colombian's chances of a historic Giro-Vuelta double disappeared in an instant.
COMING UP: Thursday's 166km stage 12 is a repeat of the eight loops around the town of Logrono that we saw two years ago. Expect nothing else than a bunch sprint.
- Sports & Recreation
- Chris Froome
- Nairo Quintana
- Robert Gesink
- Rigoberto Uran