First-half goals from Tiago and Saul Niguez put Atletico in command before Antoine Griezmann and Mario Mandzukic sealed a first home league win over Real since 1999 just after the hour mark.
Atletico have now beaten their city rivals twice in La Liga and over two legs in the Spanish Supercup and Copa del Rey this season to bounce back in fine style from their heartbreaking loss in the Champions League final last season.
Real still lead their city rivals by four points, but Barcelona can move to within a point of the leaders should they beat Athletic Bilbao on Sunday.
"It is easy to analyse this game because Atletico were better in every facet of the game: they fought more, had more quality on the ball, had better organization, everything," said Real boss Carlo Ancelotti.
"It is the worst game we have played since I have been coach."
Atletico boss Diego Simeone meanwhile lauded his players ability to carry out his gameplan better than he could ever have imagined.
"I always insist that the players are the most important people. Today their capacity to understand what we needed and execute it was fantastic," said the Argentine.
World Player of the Year Cristiano Ronaldo returned from a two-game ban, but the visitors were otherwise depleted without the injured Sergio Ramos,
Pepe, Luka Modric, James Rodriguez and suspended Marcelo.
Atletico suffered an injury blow of their own after just 10 minutes when Spanish international Koke limped off, but that curse turned into a blessing as he was replaced by Saul.
The hosts went in front on 13 minutes when Mandzukic laid Juanfran's cross from the right into the path of Tiago on the edge of the area and the Portuguese's low effort had too much power for Iker Casillas, who will feel he should have kept it out.
Four minutes later Atletico doubled their lead with a move of real quality as Guilherme Siqueira hurtled down the left and his cross was acrobatically turned home by Saul with an overhead kick.
Atletico's advantage at the break could have been even greater as Griezmann had a goal marginally ruled out for offside and strong claims for a penalty against Sami Khedira were waved away after he blocked Diego Godin's effort with his hand.
Real offered barely anything as an attacking threat in the first period and coach Carlo Ancelotti responded by introducing Jese Rodriguez for Khedira at the break.
However, it made little impact as Real failed to muster a single shot on target during the 90 minutes.
Griezmann came close twice more with a powerful shot that Casillas parried before also trying his luck with an overhead kick that flew inches over.
The Frenchman did get the goal his performance deserved 24 minutes from time when Saul headed Arda Turan's cross back across goal and he out-muscled international team-mate Raphael Varane to prod home from a yard out.
And Real's embarrassment was complete a minute from time when substitute Fernando Torres crossed for Mandzukic to power home a header into the far corner.
Elsewhere, Villarreal moved to within a point of Sevilla in fourth with a routine 2-0 win over Granada thanks to goals either side of half-time from Mateo Musacchio and Gerard Moreno.
David Moyes has still just managed just three La Liga wins in 11 games since taking charge of Real Sociedad as Nolito's late equaliser handed Celta Vigo a share of the spoils at Anoeta.
Moyes's men are now just five points above the relegation zone after Levante ended a nine-game winless streak in emphatic fashion with a 4-1 rout of Malaga to move up to 17th.