The world number 123 from Italy ended the 11-match win streak of the veteran Serb at Masters events, with Nardi bettering the childhood tennis idol whose poster hung above his bed from the age of eight.
The 20-year-old was not awed by the big game of Djokovic, and broke Djokovic for a 4-2 lead in the deciding set before pounding out the victory three games later with a match point ace.
The Italian finished with 36 winners and 41 unforced errors while Djokovic had 31 errors in just under two and a half hours.
"Before this night no-one knew me," Nardi said in an on-court interview after his win. "I hope the crowd enjoyed the game; I'm super happy with this one."
Asked how he had pulled off the biggest win of his career, Nardi replied: "I don't know. I think it really is a miracle. I'm a guy ranked outside the top 100 in the world and now I'm beating Novak - crazy, crazy."
Nardi only reached the main draw in Indian Wells after a withdrawal. He had been beaten by Belgium's David Goffin in the final round of qualifying.
Djokovic meanwhile attributed his defeat to a bad day at the office.
"He got in as a lucky loser to the main draw, so he really didn't have anything to lose," Djokovic said of Nardi.
"He deserved to win. I was more surprised with my level. My level was really, really bad. That's it, these two things come together - he's having a great day; I'm having a really bad day."
