Chris Froome (Sky) finished third after putting on a descending masterclass from atop the summit of the Mont du Chat right down into the two-kilometre flat finish in La Motte-Servolex.
The Brit had only moments before looked in trouble on the grippiest part of the 8.7km ascent, but rallied to finish the climb with Porte and Fuglsang, the trio dropping other GC favourites Alejandro Valverde (Movistar), Alberto Contador (Trek-Segafredo) and Romain Bardet (AG2R) after a series of attacks.
Fabio Aru (Astana) though successfully managed to earlier slip away, cresting the summit with around 14 seconds advantage.
Froome hotly pursued Aru down the climb, gapping Fuglsang and Porte several times. But the pair held on as he caught the Italian and the quartet organised themselves for the final sprint.
It was Fuglsang's first victory in five years and his first at the Dauphiné.
"It's really nice to win here for the first time," the Danish rider said. "It's great. It's the success of the team, not only Fabio and me but all the guys who worked before the main climb and protected us in the past few days. I like to ride the Dauphiné like this, being two guys at the front with the two favourites for the Tour.
"There's been a lot of bad luck for our team his year, but finally everything seems to come together."
Porte was far from disappointed losing out to Fuglsang.
"It's an incredible feeling to get the yellow jersey," the Tasmanian said. "There were a lot of attacks on the climb but we stayed calm. I'm just happy to come there with Chris Froome, Jakob Fuglsang and Fabio Aru.
"It was a good stage with a crazy descent. I'm in a good place. It's nice to have the jersey but the next two days will be super hard. However, I've got the team to try and finish it up on Sunday.”
Baby, there were fireworks
Going into the stage, much was expected of the Mont du Chat climb and it delivered - and then some. But it was unique for apart from Aru, no one looked super strong on the difficult gradient.
Valverde was the first GC contender to light it up attacking the lower part of the slope with the breakaway still two minutes and seven seconds up ahead. No one responded until Esteban Chaves (Orica Scott), Rafa Valls (Lotto-Soudal) and Aru managed to find a rhythm and join the Movistar leader. But there was no co-operation and a group containing Porte, Froome and Bardet bridged across.
Fuglsang then attacked to pursue the remains of the breakaway. Behind him, a new set of chancers tried to follow including Michal Kwiatkowski (Sky), Dan Martin (QuickStep Floors), Louis Meintjes (UAE) and also Bardet, Aru and Valls. A group containing Froome, Porte Contador and Valverde were a little further behind.
Aru bridged to team-mate Fuglsang as they cleaned up the stragglers from the breakaway. Behind, Froome and Porte managed to free themselves from the pack and had Aru and Fuglsang within their sights, two kilometres from the summit. Aru sensing danger went alone, as Froome and Porte then joined Fuglsang.
Serge Pauwels (Dimension Data) enjoyed a brief moment as virtual race leader after the six-rider break he was part of pulled clear early on, reaching a maximum lead of eight minute and 25 seconds with 66km to go.
Despite their man Oliver Naesen up ahead in the break, AG2R worked hard on the front of the peloton to eat into the lead, a win for Bardet steadfast in their minds. Their work paid off as the gap fell to five minutes just 30 kilometres later.
By the time Anthony Turgis (Cofidis), Nils Politt (Katusha-Alpecin), Alberto Bettiol (Cannondale-Drapac), Thierry Hupond (Delko Marseille Provence KTM), Pauwels and Naesen hit the Mont du Chat they enjoyed just a three minute and seven-second buffer.