The 50th-ranked Zverev played unbelievable sustained tennis to down Murray 7-5, 5-7, 6-2, 6-4 and will play either Roger Federer or Kei Nishikori in the quarter-finals.
Left-hander Zverev's stunning upset means that both top seeds are now out of the tournament before the quarter-finals after Novak Djokovic's shock third-round loss.
That last happened at a Grand Slam at the 2004 French Open when Roger Federer and Andy Roddick were ousted in the third round and second round respectively.
Zverev had already recorded his best Grand Slam performance after reaching the round of 16, and now he has won through to the quarters.
Zverev's career-high performance against the world number one came after his younger brother, 24th-ranked Alexander, took Rafael Nadal to five sets before losing their third round match on Saturday.
"I was just serve and volleying my way through it. I don't know how I won certain points," Mischa Zverev said.
"My brother inspires me all the time. He challenges me to do better on the court. He is still ranked higher than me. He gets to walk in the door first when we go home."
- No free pass -
================
Murray couldn't find a solution to left-hander Zverev coming into the net after his serve, and many times resorted to the lob to get points.
The British top seed's serve was broken eight times and he made 66 forced errors, testament to the constant pressure put on him by Zverev.
Murray got an early break in the second set but he exchanged service breaks with the German and twice had Zverev 0-40 down with set points.
Zverev saved four set points in the 10th game and again came under pressure in his next service game at 0-40 before the world number one levelled the match with a backhand return winner.
In the opening two sets Murray had 13 break points on his serve, while having 12 on the Zverev 'leftie' serve.
Zverev again broke the Murray serve at the start of the fourth set to close in on a stunning victory.
Every time Murray appeared to play the winning shot, Zverev came up with the better volley to take the point.
Murray, who has lost five finals in Melbourne, was the favourite to finally break through after the stunning exit of six-time winner Djokovic.
The Scot had not lost before the quarter-finals at the Australian Open since losing to Spaniard Fernando Verdasco in five sets in 2009.
Disclaimer: No Business Standard Journalist was involved in creation of this content
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