Famous more for being the boyfriend of Maria Sharapova, the 22nd ranked 22-year-old Bulgarian has long been identified as a rising talent in men's tennis but previously flattered to deceive on the game's biggest stages.
In the Margaret Court Arena bearpit on Saturday, though, he held his nerve through the tightest of fourth set tiebreaks to seal the victory on his fifth match point when Canadian Raonic netted a forehand.
The man once nicknamed "Baby Fed" for the similarity in his playing style to Roger Federer will next face world number 62 Roberto Bautista for a place in the quarter-finals after the Spaniard beat Benoit Paire 6-2 6-1 6-4.
Elsewhere, Stephane Robert beat Martin Klizan of Slovakia 6-0 7-6 (7-2) 6-4 to became the first lucky loser to reach the last 16 at Melbourne Park, having squeezed into the main draw when Germany's Philipp Kohlschreiber pulled out through injury.
Third round results:
4-Andy Murray (Britain) beat 26-Feliciano Lopez (Spain) 7-6(2) 6-4 6-2
22-Grigor Dimitrov (Bulgaria) beat 11-Milos Raonic (Canada) 6-3 3-6 6-4 7-6(10)
Roberto Bautista (Spain) beat 27-Benoit Paire (France) 6-2 6-1 6-4
6-Roger Federer (Switzerland) beat Teymuraz Gabashvili (Russia) 6-2 6-2 6-3
Stephane Robert (France) beat Martin Klizan (Slovakia) 6-0 7-6(2) 6-4