It was the first time the slalom had been run as a parallel, with opponents racing one-on-one as well as against the clock.
Ruby, the 1998 Olympic gold medallist in giant slalom, left herself too much to do after finishing 1.8 seconds behind her compatriot in the first run of the final.
Blanc, 26, survived a couple of scares to finish close behind the seven-times world championship medalist on the second run and claim the gold.
In the head-to-head race-off for the bronze, Italy's Lidia Trettel took third place after Poland's Jagna Marczulajtis crashed out on the second run while trying to make up a 0.27secs deficit from the first.
"I wanted this so hard, you know, from the bottom of my stomach"
Blanc, a 26-year-old from the southern town of Nimes, bounced back from a disappointing 22nd place in the slalom in Nagano.
There she missed out on silver when she fell and slid across the line on her back and out of medal contention.
"This is exceptional, I had to make up something after falling in Nagano. I just had to win," she said.
"I'm here, and I don't know how I did it," Blanc said. "I wanted this so hard, you know, from the bottom of my stomach.
"I just try to realize (what I have done) - but it's amazing."
The 1994 junior world champion went on to dedicate her victory to her former team-mate Regine Cavagnoud who died in November.
Cavagnoud, the super-G world champion, died after sustaining brain injuries in a high-speed collision with a German trainer in Austria just days after finishing third in the season-opening giant slalom at Soelden.
"She's done all the best, she had what she was dreaming for," Blanc said. "She left us with a strong image."