Sao Paulo, who had won their first five matches, conceded all the goals in the second half after defender Carlinhos Paraiba was sent off just minutes before half-time for a second booking.
It was their worst ever defeat against their arch-rivals in Brazilian championship matches and narrowed their lead in the standings to two points over Corinthians, who have a game in hand.
Midfielder Danilo opened the scoring in the 46th minute, former Portugal striker Liedson notched a hat-trick and his fellow forward Jorge Henrique (pictured) completed the rout by beating goalkeeper Rogerio Ceni with a free-kick.
Sao Paulo have 15 points, Corinthians 13 and Palmeiras, the third team from the city of Sao Paulo, 11 after a 2-0 loss at Ceara.
The leaders, who have bet on youth this season, are already without midfielder Lucas, who is in Argentina with Brazil preparing for the Copa America in July, and will also lose four young players picked for the under-20 World Cup in Colombia from July 29 to August 20.
"This brought us back down to earth. It was a good lesson," Sao Paulo striker Dagoberto told reporters as he left the pitch.
Corinthians and Flamengo are the only unbeaten teams after the side from Rio ended a run of four draws with a 4-1 home win over Atletico Mineiro with a brilliant goal from Ronaldinho on Saturday.
The former FIFA World Player of the Year, blamed for Flamengo's recent indifferent form, hit a superb 67th-minute equaliser into the top corner after midfielder Dudu Cearense had headed the visitors into the lead.
Ronaldinho, booed off after last weekend's 0-0 draw with Botafogo, had his name chanted by the fans. Midfielder Thiago Neves also scored and striker Deivid scored hit a brace in the last five minutes.
