The left back netted the winner as BVB picked up its first-ever win over the Spaniards, leaving them with one win in their previous 24 visits to the country in the process
In an evenly contested fixture it was the reigning Bundesliga champions who struck first through Robert Lewandowski but just two minutes later Cristiano Ronaldo equalized with a stunning strike.
Although being the away side, Jose Mourinho's men had a far greater ball retention but that counted for nothing come the final whistle as Marcel Schmelzer's second-half strike ensured BVB took all three points.
The attacking nature of both sides was displayed from the off as neither side sat back in a very open and stretched start.
With five minutes played, a loose pass from Marco Reus offered Real Madrid its first chance to work the keeper. Ronaldo charged down the left flank but Mesut Ozil was unable to connect with his cutback and steer the ball on target.
But this was by no means the start of an early Blancos onslaught as BVB proved itself capable of linking a number of passes together in the opposing half.
One such move in the 13th minute created space for Sebastian Kehl to try his luck with a shot from distance but a scrambling Iker Casillas managed to get across and parry the ball aside.
Sami Khedira was replaced by Luka Modric due to injury after 20 minutes and although Mourinho's side enjoyed the lion's share of possession, the hosts were relatively comfortable.
After seeing another impressive effort saved by Casillas, Kehl continued to be Dortmund's driving force and that his involvement was key when his side moved ahead.
Having read the play to pounce on a loose pass from Pepe, he slid a first-time pass straight into Lewandowski. The striker raced through a gap in the defense and fired a low effort past the keeper with 36 minutes played.
Madrid responded to going behind magnificently and managed to restore parity just two minutes later. A long ball forward from Ozil found Ronaldo in space on the left and with Sven Bender unable to make up the ground he lifted the ball over Roman Weidenfeller for a superb finish.
The second half began in a similarly electric fashion to that of the first as Casillas was called into action within five minutes. Mario Gotze sent Lukasz Piszczek's cut back straight down the middle and, although unsighted, the keeper parried it aside.
Five minutes later Schmelzer put enough pressure on Angel Di Maria to stop the Argentine from finding the bottom corner and the BVB left back then displayed his ability at the other end of the field.
Casillas could only punch a cross from the left and it fell to Schmelzer 20 yards from goal and the Germany international showed fantastic technique to rifle a volley into the bottom corner in the 64th minute.
Dortmund managed to contain the Liga champions from then on, dispelling the accusations of naivety that were hanging over them following last season's premature exit.
The three points see Jurgen Klopp's men take charge of Group D as they move one point above the Spanish side and into pole position ahead of the return fixture at the Santiago Bernabeu in a fortnight.