O'Sullivan, who won the Masters and the Welsh Open earlier this year, became the latest high-profile casualty after just his second match at the Guildhall.
Neil Robertson, Mark Selby, Ding Junhui and Stuart Bingham - the four top-ranked players in the world - have also been sent packing early from the tournament.
The prized scalp for Yu, ranked 48 in the world, means the Chinese will contest his first quarter-final in a ranking event against Barry Hawkins, who edged Ryan Day 4-3 in a late-finishing match.
O'Sullivan said: "I played okay today but he is a very good player. I started slowly and that cost me. Sometimes a defeat can do you good because having won the Masters and the Welsh I was wondering when the run would come to an end. I can knuckle down now and get my game into shape."
Judd Trump eased into the last eight with a comfortable 4-0 win over Haikou World Open champion Shaun Murphy and will now play Joe Perry for a place in the semi-finals. Perry booked his place with a 4-1 win over David Gilbert.
"My safety was good and my positional play was the best it's been for a while," said Trump. "When Ronnie goes out, everyone perks up a bit and thinks they have a better chance of winning, but I've got a tough game next against Joe, he has beaten me the last couple of times we've played so he's favourite."
Gerard Greene came back from 3-0 down to beat Anthony Hamilton 4-3, while there were also wins for Mark Allen, Marco Fu and John Higgins.
Round of 16 results:
Gerard Greene  4-3 Anthony Hamilton 
Judd Trump  4-0 Shaun Murphy 
Yu Delu  4-3 Ronnie O'Sullivan 
Mark Allen  4 -1 Fergal O'Brien 
Joe Perry  4 -1 David Gilbert 
Marco Fu  4-2 Mark J Williams 
John Higgins  4-2 Ben Woollaston 
Barry Hawkins  4-3 Ryan Day 
- Sports & Recreation
- Barry Hawkins
- Mark Selby
- Shaun Murphy
- Stuart Bingham