Tiago Mendes opened the scoring for the champions at a raucous Vicente Calderon after 13 minutes and substitute Saul Niguez doubled the lead with an acrobatic goal just moments after replacing Koke.
Antoine Griezmann and Mario Mandzukic added to the goal glut in the second half to leave stunned Real thoroughly humiliated.
The win saw Atletico cut the gap to league leaders Real to four points and gave Barcelona the chance to close it to just one if they win at Athletic Bilbao on Sunday.
This was the sixth meeting between the two clubs from the Spanish capital this season, with Real not managing to beat their derby rivals since winning the Champions League final last May.
Ancelotti was without four key starters due to injuries to Sergio Ramos, Pepe and James Rodriguez and Marcelo’s suspension, but the Italian was able to recall the league’s top scorer Cristiano Ronaldo after a two-match ban.
Despite having their first choice front three available, the unfamiliar centre-back pairing of Nacho and Raphael Varane left Real badly exposed at the back, while Fabio Coentrao and Sami Khedira, who had only started two league games each this season before today, did not help matters.
The Portuguese left-back nearly got his side into trouble in the opening minutes by sending Arda Turan to the ground in the area, but the referee waved play on.
A few moments later the defender was powerless to stop Juanfran getting to the byline and finding Mandzukic in the area. The Croatian controlled the ball with his chest and laid it off for Tiago to drive at goal, the ball slipping through the hands of Iker Casillas and over the line.
Despite witnessing a revival in fortunes against their rivals, the Calderon had yet to experience a league win over Madrid in the 21st century. Now the home fans smelled blood and bayed for more.
Guilherme Siqueira eased his way down the left wing to the byline and chipped the ball towards the far post, where Saul conjured an acrobatic scissor-kick which went off the near post and into the net.
Griezmann could have made it 3-0 midway through the first half, but on this occasion Casillas made the save.
Real were mere spectators to the Atletico onslaught and needed half-an-hour before their first incursion into their opponents box, but Toni Kroos’ low shot was booted away by Miranda. Real could only manage one shot on target throughout the 90 minutes.
Los Blancos were also fortunate not to concede a penalty towards the end of the half when Khedira appeared to block a shot by Juanfran with his hand in the area, but again the referee stood firm.
Atletico continued their dominance in the second half and could have extended their lead through Griezmann, who hit an overhead-kick on to the roof of the net, and Tiago, who could only send a free header straight at Casillas.
However, the third goal eventually arrived on 66 minutes. Arda spread the play to Saul at the far post and the midfielder headed the ball across goal and Griezmann stuck out a leg to poke it in.
But Madrid’s misery was still not complete.
With one minute remaining substitute Fernando Torres careered down the right wing and crossed for Mandzukic to head in goal number four and crown Atletico’s heaviest defeat of their rivals since 1987.