Astana rider Fabio Aru of Italy surged clear to win the 153.4-km 11th stage into San Miguel de Aralar, which began in Pamplona and included several steep ascents.
Valverde of Movistar, Katusha's Joaquim Rodriguez, another Spaniard, and Tinkoff-Saxo rider Contador crossed the line bunched together in second, six seconds behind the Italian.
Valverde was second overall overnight and trimmed seven seconds off Contador's lead thanks to the bonus system for the intermediate sprint and finish.
Contador, who won the Tour of Spain in 2008 and 2012, was a surprise entrant at the latest edition of his home race after he fractured a shin bone at the Tour de France in July.
"The stage win today was for the best rider and I limited myself to keeping an eye on the rivals who are closest to me in the overall standings," he told reporters.
Valverde said he had mixed feelings about the stage due to team mate Quintana's misfortune but that he was ready to take over leadership of the Movistar team.
"Considering it was a mountainous stage and how strong Contador is, coming out of it closer to him in the standings instead of further away is a reason to be pleased," he said.
"It's going to be tough to attack but what I need to do now is hang in there, day by day, and if I can keep trimming the gap so much the better."
Earlier, Quintana, who had the red jersey heading into Tuesday's 10th stage, suffered a second fall in as many days and a fractured shoulder blade ended the Movistar rider's participation.
The Giro d'Italia champion had "suffered a displaced fracture in his right-hand scapula" and would "undergo surgery on Thursday", Movistar said on their Twitter feed.
Britain's Chris Froome, one of the pre-race favourites who is also returning from injury, finished fifth on Wednesday and moved up one place to fourth overall, but lost three seconds on Contador and is one minute and 21 seconds adrift.
Colombian Rigoberto Uran of Omega Pharma-Quick-Step is third overall, one minute and eight seconds down.
The three-week Tour concludes on Sept. 14 with stage 21, a time trial in the north-western city of Santiago de Compostela.
(Reporting by Iain Rogers, editing by Justin Palmer)
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