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John Gosden's odds-on favourite Enable, ridden by Frankie Dettori, looked set to become the first horse to win the Arc three times in the 98th edition when she pulled clear in the final straight, but was pipped on the line by 16-1 shot Waldgeist.
The five-year-old winner delivered French trainer Fabre his first success in the five-million-euro ($5.49 million) showpiece since Rail Link in 2006.
"I'm very proud that Waldgeist managed to beat such a fantastic mare and it's well deserved in some ways, so I'm delighted," Fabre, who claimed his first Arc in 1987 with Trempolino, told ITV.
"(I thought he would win) when he passed Enable. The Arc is always a big race because you have a combination of the best mares, best colts. It's a great race."
It was a first win in the race for French jockey Pierre-Charles Boudot.
"I'm really happy to win my first Arc, it's the horse of my life," said Boudot. "I respect Enable because we denied the champion a third coronation. I can die now."
Sottsass finished third for 27-year-old rider Cristian Demuro and trainer Jean-Claude Rouget at 8-1.
It was only the second defeat from 15 races for Enable, but Gosden would not say whether the five-year-old mare would run again, insisting the decision would be made by owner, Saudi prince Khalid Abdullah.
Enable, the 2017 and 2018 winner who went off at 4/6, was guided into a strong position by Dettori and sent for home, but could not hold off Waldgeist on soft ground at the end of the mile-and-a-half distance.
"She ran an absolutely brilliant race. Waldgeist came late and strong after they went a good pace," said the 68-year-old Gosden, who was bidding for a fourth victory in five years.
"Frankie committed and went for it and with the ground testing her, it's hard to show that turn of foot and Waldgeist has outstayed her on the ground. Full credit to Andre (Fabre).
"I'm happy with the race but she doesn't have the same explosive turn of foot on soft, she quickened up well but was outstayed in very testing conditions."
Enable had previously won the Eclipse Stakes, King George VI and Queen Elizabeth Stakes and the Yorkshire Oaks this year.
"We have to accept defeat in racing. Prince Khalid will make a decision on her future - he will want to reflect and give it some good thought," said Khalid Abdullah's racing manager Teddy Grimthorpe.
Second-favourite Japan also briefly moved into contention under Ryan Moore, but ultimately finished fourth in the 12-strong field for Aidan O'Brien.
There was no maiden triumph for Japan the country either, as the Asian nation's horses could not even repeat the near-misses of the past, with outsider Kiseki the best finisher in seventh.
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