The former champion and third seed was beaten 6-3 3-6 6-4 in the biggest upset of the tournament so far.
Sharapova, who won the US Open in 2006 but has not won a grand slam title since the 2008 Australian Open, was one of the favourites to win the crown after winning a lead-up event in Cincinnati.
But the Russian made a whopping 60 unforced errors and served 12 double faults, including two in the final game which she needed to hold to stay alive.
"It's disappointing to lose in New York. Losing isn't fun for anyone because we work to win," Sharapova said.
"We don't work to try to lose. So when we're faced with a position where we can win and we didn't in the end, it's tough."
For Pennetta, a quarter-finalist at Flushing Meadows in 2008 and 2009 who is seeded 26th, it was a moment to savour as she celebrated her victory on a baking hot day at the Arthur Ashe Stadium.
"I think this one is one of the best victories in my career, and is gonna be like this forever," she said.
"It's a good moment. I'm really happy right now but it's just a match. It's over, and I have to be focused for the next one."
Pennetta's next opponent is China's Peng Shuai, the 13th seed, who advanced with a 6-4 7-6 win over Julia Goerges of Germany in an increasingly wide open women's draw.
None of the remaining players in the bottom half of the draw have won a grand slam title before and the only two to have played in a final are last year's runner up, Vera Zvonareva of Russia, and Australia's Sam Stosur.
Zvonareva, seeded second, beat Anabel Medina Garrigues 6-4 7-5 on Friday while Stosur, a finalist at the French Open last year, was due to face Nadia Petrova later in the day.
There were no major early casualties on Friday in the men's draw, which has mostly gone according to script.
Former champion Juan Martin del Potro sailed through with a 6-2 6-1 7-5 win over his fellow Argentine Diego Junqueira while the big-serving American John Isner blasted past his countryman Robby Ginepri 6-4 6-3 6-4.
The defending champion Rafa Nadal and British fourth seed Andy Murray were playing later matches.
