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The British rider was slower than Contador on the first part of the undulating 32km course, from Embrun to Chorges in the French Alps, but gained time on the final section to finish nine seconds ahead of the Spaniard and clinch his third stage win of the race.
Froome, who has also won two mountain stages, made up for last week when he was edged out by Tony Martin in the first time-trial on Stage 11.
"This is incredible for me," Froome said.
"This morning I thought to myself: 'OK, I'm ready to lose a bit of time because tomorrow will be very hard.' So I'm surprised to win."
Bauke Mollema held second place overall for several stages, but Contador took his place with the Dutchman dropping to fourth.
Joaquin Rodriguez finished the stage in third place, 10 seconds behind Froome — who is 4 minutes, 34 seconds ahead of Contador overall and 4:51 clear of Contador's Saxo-Tinkoff teammate, Roman Kreuziger. Mollema is fourth, 6:23 back.
Froome, wearing an aerodynamic black helmet with a thick yellow stripe down the middle, coughed into his right hand as he prepared to start.
When the five-second countdown finished, Froome puffed his cheeks and rolled down the ramp.
The day after narrowly avoiding a crash when Contador fell just in front of him on a long downhill, Froome started cautiously on a circuit that was slippery after some afternoon rain and featured two short, sharp climbs and two quick descents.
"The first downhill was dangerous and very technical, so I didn't want to take any risks," Froome said.
He was two seconds behind Contador at the first time split.
The Spaniard was happy to take more risks and continued to open up a gap.
It looked to be Contador's day, with Froome 11 seconds behind when reaching the top of the second climb.
The Briton then started to claw back the deficit.
Riders now have three gruelling days of climbing in the Alps before Sunday's night-time finish on the Champs-Elysees.
Thursday's 172.5km trek from Gap to L'Alpe-Huez sees two HC ascents of L'Alpe-Huez — one of the Tour's most famed climbs. Both of the ascents are known as HC (Hors Categorie, meaning they are so tough they are considered beyond classification.
Not only that, there is also a treacherously fast descent from the top of Col de Sarenne — which might make Froome a bit nervous after nearly falling on Tuesday.
There are two more HC climbs and two Category 1 ascents on Friday, and Saturday finishes with an HC.
Wednesday's route ascended immediately for 6.4km up Cote de Puy-Sanieres, and the first descent featured several hairpins.
After that there was a slightly longer uphill drag up Cote de Reallon, followed by a longer descent.
"That's one of the hardest time-trials I've ever done," said Lieuwe Westra, who finished 17th.
"I don't remember anything like it."
American rider Tejay van Garderen, who was 10th, was relieved to finish the stage.
"The entire course, any moment you could make a mistake and slip up — it wasn't just @ one point," he said.
"You had to stay calm and focused."
One rider was in trouble before the stage started.
French cyclist Jean-Christophe Peraud went for a training ride in the morning and fell on a descent.
He sustained a small fracture to his right shoulder but the team's medical staff deemed him fit to ride.
His miserable day continued when he fell near the end, landing heavily on the same shoulder.
He looked bewildered as he sat up on the road, and then clutched his arm as team members rushed to his aid.
Mollema had a scare of his own near the end when he took a turn too fast and slammed into the barriers.
Luckily, he was able to control the impact and managed to continue.
As rain started to fall — a rare sight in itself on what has been a sweltering Tour — Arnold Jeannesson of France lost control and almost hit a metal barrier.
Results of the 17th stage of the Tour de France, a 32.0km time trial from Embrun to Chorges on Wednesday:
1. Chris Froome (GBR/SKY) 51min 33secs
2. Alberto Contador (ESP/SAX) at 0:09.
3. Joaquin Rodriguez (ESP/KAT) 0:10.
4. Roman Kreuziger (CZE/SAX) 0:23.
5. Alejandro Valverde (ESP/MOV) 0:30.
6. Nairo Quintana (COL/MOV) 1:11.
7. Michal Kwiatkowski (POL/OPQ) 1:33.
8. Jakob Diemer Fuglsang (DEN/AST) 1:34.
9. Andrew Talansky (USA/GRM) 1:41.
10. Tejay Van Garderen (USA/BMC) 1:51.
11. Bauke Mollema (NED/BKN) 2:09.
12. Maxime Monfort (BEL/RSH) 2:17.
13. Michael Rogers (AUS/SAX) 2:25.
14. Jon Izagirre (ESP/EUS) 2:25.
15. Andy Schleck (LUX/RSH) 2:27.
16. Lieuwe Westra (NED/VAC) 2:29.
17. Laurens ten Dam (NED/BKN) 2:29.
18. Rein Taaramae (EST/COF) 2:40.
19. Thomas De Gendt (BEL/VAC) 2:41.
20. Alessandro De Marchi (ITA/CAN) 2:42.
98. Daryl Impey (RSA/ORI) 6:06.
. Jean Christophe Peraud (FRA/ALM) Retired
. Gorka Izagirre (ESP/EUS) Withdrawn
Overall General classification:
1. Chris Froome (GBR/SKY) 66hr 07min 09sec
2. Alberto Contador (ESP/SAX) at 4:34.
3. Roman Kreuziger (CZE/SAX) 4:51.
4. Bauke Mollema (NED/BKN) 6:23.
5. Nairo Quintana (COL/MOV) 6:58.
6. Joaquin Rodriguez (ESP/KAT) 7:21.
7. Laurens ten Dam (NED/BKN) 8:23.
8. Jakob Diemer Fuglsang (DEN/AST) 8:56.
9. Michal Kwiatkowski (POL/OPQ) 11:10.
10. Daniel Martin (IRL/GRM) 12:50.
11. Michael Rogers (AUS/SAX) 13:19.
12. Alejandro Valverde (ESP/MOV) 15:12.
13. Andrew Talansky (USA/GRM) 15:13.
14. Daniel Navarro (ESP/COF) 16:43.
15. Maxime Monfort (BEL/RSH) 17:04.
16. Andy Schleck (LUX/RSH) 23:34.
17. Mikel Nieve (ESP/EUS) 23:36.
18. Cadel Evans (AUS/BMC) 24:44.
19. Daniel Moreno (ESP/KAT) 27:35.
20. Romain Bardet (FRA/ALM) 28:43.
60. Daryl Impey (RSA/ORI) 1h24:29.
