Frenchman Jimmy Casper is a surprise winner of a bunched sprint finish, pipping Australian Robbie McEwen and German Erik Zabel on the line.
Yellow jersey holder Thor Hushovd finishes with blood pouring from a gash to his right elbow after catching it on an object in the crowd.
The Norwegian still crosses in ninth place with the same time, but loses the yellow jersey to George Hincapie.
The American takes the lead via a time bonus for third in the last sprint.
1 Jimmy Casper (Fra)
2 Robbie McEwen (Aus)
3 Erik Zabel (Ger)
4 Daniele Bennati (Ita)
5 Luca Paolini (Ita)
LATEST UPDATES (all times BST):
1628: Frenchman Jimmy Casper is a surprise winner of the stage, pipping Robbie McEwen and Erik Zabel on the finishing line. Hushovd takes ninth place, in the same time as the winner.
1626: Tom Boonen hits the front with a few hundred metres to go but Thor Hushovd, the yellow jersey leader, catches his arm on something in the crowd and finishes with blood pouring from the wound.
1625: The sprinters are all jostling for position as they head into the final kilometre towards the finish.
1622: Beneteau won the final sprint but has now been swallowed by the peloton, which is less than 5km from the finish.
1620: George Hincapie, leader of the Discovery Channel team, attacks the peloton on the approach to the third intermediate sprint in Kehl to claim two points for third place.
1 Walter Beneteau (BTL) 6pts
2 Sebastian Hinault (C.A) 4pts
3 George Hincapie (DSC) 2pts
1615: Beneteau's lead is down to 20 seconds with the sprinters' teams bearing down on him with 10km to go.
1612: Vaugrenard, Sprick and Auge are caught by the peloton, which swiftly hoovers up Portal and Wegmann, leaving Beneteau out on his own in front.
1608: The first of the leaders to launch an attack, with 15km to go, is Frenchman Walter Beneteau, who opens up a 100m gap on Vaugrenard.
1605: The leading group may lose their advantage on the peloton before the third and intermediate sprint with 9km left. The gap is now 40 seconds.
1600: The CSC team - with Stuart O'Grady given the go-ahead to contest the final sprint is also moving towards the front of the peloton. With 22km to go, the gap to the leaders is now down to less than a minute.
1555: Riders from the Lampre team have moved up to the head of the peloton to help chase down the leaders. The gap is down to 1:25.
1550: There are time bonuses on offer for the first three riders (20, 12 and 8 seconds respectively) across the finish line. Tom Boonen, who finished the prologue 11 seconds behind Hushovd, could take over the yellow jersey if he is able to win and Hushovd finishes no better than third.
1545: The advantage of the leading group is now down to 1:30 with the peloton passing through the 151km mark.
1540: Belgian Tom Boonen, the world champion and winner of the first two stages of last year's Tour, is favourite to snatch victory in a bunched finish in Strasbourg. But for the moment he is content to sit at the back of the peloton and let his Quickstep team-mates take the strain.
1537: The peloton arrives in Germany, 1:50 behind the leading group of seven.
1535: The leaders cross the border after 141km into Germany, where 34.5km of the stage will ensue before the final, frantic last nine kilometres back in France to the finish in Strasbourg.
1530: With the leaders 45km away from the finish, they are now around 2:20 ahead of the pelton, which continues to be led by riders from Credit Agricole, Milram, Quickstep and Davitamon-Lotto teams.
1528: Frenchman Walter Beneteau gets the better of comptariot Benoit Vaugrenard on the second intermediate sprint after 137 km, reversing the positions of the first sprint.
1 W Beneteau (BTL) 6 points
2 B Vaugrenard (FDJ) 4 points
3 M Sprick (BTL) 2 points
1525: With the second intermediate sprint of the stage at Plobsheim now imminent, the peloton is just two minutes behind the leaders. This means the gap has halved in the last 20 minutes.
1512: The finishing line in Stasbourg is just 60km away but will the leaders hold on? It is looking increasingly unlikely as their advantage is disappearing fast.
It is now just 3:30, which means 30 seconds have gone in little over 10 minutes. Driving the chase are the Credit Agricole, Milram, Quickstep and Davitamon-Lotto teams. These are the teams of sprint stars Thor Hushovd, Erik Zabel, Tom Boonen and Robbie McEwen respectively.
1502: The chase is on in earnest now. The leading group's advantage, which was five minutes at 56km, is down to four minutes as the sprinters' teams in the peloton start to work together.
1440: German Fabian Wegmann, of the Gerolsteiner team, takes the honours in the only climb of the stage, and will wear the polka-dot jersey in stage two.
1 Fabian Wegmann (GST) 3 points
2 Matthieu Sprick (BTL) 2 points
3 Unai Etxebarria (EUS) 1 point
1435: The leading group of seven attack each other in the quest for climbing points as the first summit beckons.
1430: The Davitamon-Lotto and Quickstep teams are expected to come to the head of the peloton shortly, with their top sprinters Robbie McEwen and Tom Boonen targeting a stage win in a bunched sprint.
1420: The peloton, still led by riders from the Credit Agricole team, passes through the feed-zone around 4:35 behind the leading group.
1410: The leaders, who have passed through the feed-zone at 86.5km, are approaching the first category-four climb, the Cote de Heilingenstein, after 101.5km. That will determine the first wearer of the polka dot jersey in this year's race.
1350: The seven leaders - Matthieu Sprick, Benoit Vaugrenard, Stephane Auge, Nicolas Portal, Unai Etxebarria, Fabian Wegmann, Walter Beneteau - reach the town of Marlenheim after 69km, still around 4:30 ahead of the peloton.
1345: The breakaway group extended their lead to five minutes, but the peloton bring it back to 4:35 as they pass through Singrist after 60km.
1335: The peloton passes through the site of the first sprint 4:30 behind the leading group.
1330: Benoit Vaugrenard of the Francaise des Jeux team wins the first intermediate sprint after 53 km in Saverne.
1 B Vaugrenard (FDJ) 6 points
2 W Beneteau (BTL) 4 points
3 U Etxebarria (EUS) 2 points
1320: The breakaway group of seven riders covered 44km in the first hour of the stage. Their lead is now around 4:15.
1315: The efforts of the Credit Agricole team are starting to pay dividends as they reduce the gap on the leaders to four minutes.
1305: Riders from the Credit Agricole team continue to head the peloton, keeping the advantage of the leading group at around 4:30 over 5km.
1300: The peloton reaches Wingersheim after 26km four minutes and 30 seconds behind the seven leaders.
1250: As the peloton moves through the town of Reitwiller at the 20km mark, it is four minutes behind the breakaway group of seven.
1245: The three chasers have caught up with the breakaway quartet to form a leading group of seven riders, who are now more than three minutes ahead of a pelotonbeing controlled by the Credit Agricole team.
1240: The leading quartet are around 12 seconds ahead of the chasing trio, and over a minute ahead of the peloton.
1235: German Fabian Wegmann, of the Gerolsteiner team, Unai Etxebarria of Euskaltel, and Walter Beneteau of Bouygues Telecom are leading the pursuit of the breakway quartet.
1230: Another Frenchman, Nicolas Portal of the CEI team, joins the breakaway trio, who forge a 12 second gap over three pursuers at the head of the peloton.
1225: The first attack of the stage is instigated after 3km by Frenchman Stephane Auge of the Cofidis team. He is joined by compatriots Matthieu Sprick of the Bouygues Telecom team, and Benoit Vaugrenard of the Francaise des Jeux team.
1220: It is a quiet start to the stage with no early attacks in the first few kilometres.
1216 The 176 riders from 20 teams - the smallest field since 1984 when there were 170 - set off from Strasbourg on a stage that will cross the border into Germany after around 141km before returning to France for the last nine kilometres.