Labonte, a Nextel Cup star, came away with his 10th Busch win and first since 1998, beating Stewart, a two-time Cup champion, to the finish line by less than a car length in the race that came down to a green-white-checker finish because of a late caution.
Casey Mears and Kevin Harvick were out front when debris from the battered car of Kasey Kahne brought out a caution flag on lap 115, just three laps from the scheduled finish of Aaron's 312.
NASCAR waved the green flag again for the overtime finish at the start of lap 119 and Labonte, who restarted seventh, moved in behind Stewart, who was fifth, and the two Chevrolets, both owned by Harvick, worked in tandem, shooting to the front.
Both zoomed past Mears by the end of the first green-flag lap and Labonte just kept pushing Stewart, giving the two lead cars a big margin over Mears. Labonte bided his time on the final lap around the 2.66-mile oval until he came off turn four.
At that point, he slipped up the banking and moved alongside Stewart, with the two cars nearly touching. As they neared the finish line, Labonte nosed ahead. His engine, which was overheating badly on the final two laps after he banged into the rear of Harvick's car, blew as he crossed the finish line with steam wafting from under his hood.
"I just had a run on Tony," Labonte said. "I just stayed glued to his rear bumper. This is cool. The motor just blew up. It was pegged at 240 (degrees) the last two laps."
Stewart - locked in controversy all week after skipping the post-race press conference following the Cup race in Phoenix, drawing a $10,000 fine, and then accusing NASCAR of calling unnecessary cautions - was all smiles after losing to his longtime Joe Gibbs Racing teammate Saturday.
"That's an awesome finish," Stewart said. "He pushed me for two solid laps to get there. I have to admit I didn't see him coming.
"I was laughing when I looked over there and saw him going by. That's the most excited I've ever been by a second-place finish."
Mears, who wound up third, was obviously disappointed after holding the lead from lap 97.
"We wanted to win that one bad and probably leading it wasn't the best place to be there at the end," he said.
Rookie David Ragan finished third, followed by rookie Kyle Krisiloff, Harvick and rookie Juan Pablo Montoya, who led several times in the race.
Dale Earnhardt Jr., who appeared to have the strongest car in the field at times, wound up 29th after breaking his transmission on a restart on lap 95.
The race was marred by several crashes, including an eight-car melee on lap 110 that brought out a 16-minute red flag to allow a track cleanup, and a spectacular crash by Kyle Busch on lap 27. Busch escaped injury after being tapped from behind by Stewart, bouncing off Mears, hitting the outside wall, then skidding on his roof into the infield grass and barrel-rolling before stopping on all four wheels. No injuries were reported.
There were a series-record 36 lead changes among a Busch track-record 20 drivers.