The German put together what his Red Bull team principal Christian Horner described as "probably his best lap of the year" to stun the field in what had until then been a nip-and-tuck session.
Jenson Button took ninth, sandwiched between both Force India drivers, with Nico Hulkenberg ahead and Paul di Resta behind.
On a sunny day on the Spanish coast, there was no margin for error, as Vettel's team-mate Mark Webber found to his cost in Q1. Having struggled with a hydraulics issue earlier in the day, the Australian looked ill at ease on soft compound tyres, and limped out in 19th place, allowing Heikki Kovalainen to sneak his Caterham into Q2.
The Ferraris were the next to suffer. Fernando Alonso was less than a quarter of a second behind the leading time in Q2, but his effort was only good enough for 11th place. Michael Schumacher also missed out in 12th, with Felipe Massa just hundredths of a second back in 13th.
Force India had their best qualifying session of the season so far, with di Resta topping the timesheets in Q2 and looking like a contender for pole after two sectors of his Q3 lap.
But he fell away abruptly, and that left the usual contenders their chance to stake their claim.
With Grosjean the highest-placed driver yet to win a race this season, and Valencia a notoriously tricky place to overtake, it looks as if the European Grand Prix could well be the race where a driver wins his second race of the campaign - and of the front-runners, defending world champion Vettel looks in the most ominous form.