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Movistar rider Costa soloed to victory at the end of the undulating 168 km ride from Vaison-La-Romaine to Gap after a late but timely attack on the final climb of the day, the 9.5 km-long Col de Manse.
But as he came over the finish with a comfortable lead on four chasers and a fractured peloton, a small skirmish in the yellow jersey battle was going on in his wake.
Contador had tested the Briton with several brief accelerations in the final kilometres of the Manse climb but was brought to heel by Froome's Australian teammate Richie Porte.
The road to Gap is famous for playing host to one of the most spectacular crash incidents of the Lance Armstrong era -- Joseba Beloki hitting the tarmac at speed and Armstrong, who was in pursuit, being forced through a field to avoid hitting the Spaniard.
Since Contador's efforts to leave Froome behind on the climb proved futile, the Spaniard took to upping the pace on the descent.
However that approach almost led to disaster.
Contador misjudged a tight right-hand bend and came off his bike, with Froome, who was in hot pursuit, just missing the Spaniard but being forced on to the side of the road.
Froome said afterwards: "Saxo Bank, Alberto and (Roman) Kreuziger were taking too many risks on the descent.
"If you ask me, it was dangerous for Alberto to do that. There was no need for it. They don't attack on the climbs, but they attack on the descents."
Contador said: "It was a tight bend, I tried my best not to crash. It's not my intention to hurt anyone but we're racing."
Bauke Mollema, sitting second overall overnight, showed his class by slowing to allow Froome and Contador to catch up before the group resumed racing to finish the stage at just over 10 minutes behind Costa.
Team Sky leader Froome retained his 4min 14sec lead on Dutchman Mollema (Belkin) with Saxo team leader Contador still in third place at 4:25.
Costa, taking his second career stage win on the race following his 2011 win at Super-Besse, had been part of an earlier 26-man breakaway that went on to build a significant lead on the main peloton.
He quickly built a lead on four chasers who, despite their efforts, came over the summit with a 45-sec deficit on the Portuguese.
With 11.5 km of downhill remaining, Costa's efforts before the summit paid off and he went on to cross the finish line 42secs ahead of Christophe Riblon, Arnold Jeannesson, Jerome Coppel and German veteran Andreas Kloden.
"I knew I had to keep some energy for the last climb, but I also knew where I had to attack," said Costa, a former two-time winner of the Tour of Switzerland.
"To win one stage on the Tour is special and last year I tried but didn't succeed. So to win today is even more satisfying than my first win on the race."
Results of the 16th stage of the Tour de France, a 168.0km ride from Vaison-la-Romaine to Gap on Tuesday:
1. Rui Costa (POR/MOV) 3hr 52min 45sec
2. Christophe Riblon (FRA/ALM) at 0:42s
3. Arnold Jeannesson (FRA/FDJ) 0:42.
4. Jrome Coppel (FRA/COF) 0:42.
5. Andreas Kloden (GER/RSH) 0:42.
6. Tom Dumoulin (NED/ARG) 1:00.
7. Mikel Astarloza (ESP/EUS) 1:01.
8. Philippe Gilbert (BEL/BMC) 1:04.
9. Cameron Meyer (AUS/ORI) 1:04.
10. Ramunas Navardauskas (LTU/GRM) 1:04.
160. Daryl Impey (RSA/ORI) 21:46.
. Danny van Poppel (NED/VAC) Withdrawn
. Thibaut Pinot (FRA/FDJ) Withdrawn
General Classification:
1. Chris Froome (GBR/SKY) 65hr 15min 36sec
2. Bauke Mollema (NED/BKN) at 4:14.
3. Alberto Contador (ESP/SAX) 4:25.
4. Roman Kreuziger (CZE/SAX) 4:28.
5. Nairo Quintana (COL/MOV) 5:47.
6. Laurens ten Dam (NED/BKN) 5:54.
7. Joaquin Rodriguez (ESP/KAT) 7:11.
8. Jakob Diemer Fuglsang (DEN/AST) 7:22.
9. Jean Christophe Peraud (FRA/ALM) 8:47.
10. Daniel Martin (IRL/GRM) 9:28.
11. Michal Kwiatkowski (POL/OPQ) 9:37.
12. Michael Rogers (AUS/SAX) 10:54.
13. Andrew Talansky (USA/GRM) 13:32.
14. Daniel Navarro (ESP/COF) 13:54.
15. Alejandro Valverde (ESP/MOV) 14:42.
16. Maxime Monfort (BEL/RSH) 14:47.
17. Cadel Evans (AUS/BMC) 16:40.
18. Mikel Nieve (ESP/EUS) 19:51.
19. Andy Schleck (LUX/RSH) 21:07.
20. Rui Costa (POR/MOV) 22:34.
61. Daryl Impey (RSA/ORI) 1h18:23.
