Dunlop was on course to match the all-time TT wins tally of 26 set by his late uncle Joey Dunlop having won his 25th race on Wednesday in the Supersport class.
A dominant winner in the Supertwin race on Tuesday, Dunlop was all but assured a second victory on Friday.
But his Paton broke down over the mountain section, leaving Mike Browne to take a comfortable lead and stare down his maiden TT victory.
However, Browne was a retirement on lap two due to a clutch issue, gifting Hickman a shock second win of the day and first for the Yamaha R7 in the class.
Hickman only completed his first lap on the Yamaha Supertwin on Tuesday morning having had all sorts of mechanical issues throughout practice.
Having smashed the outright lap record in the earlier Superstock race at 136.358mph for his 11th TT win, Hickman’s haul now stands at 12 with a second-career Supertwin victory.
Dunlop was only a second clear of Browne through Glen Helen on the opening lap, but was 3.3s ahead through Ballaugh and five seconds up the road at Ramsey.
It looked like the race was going to form for Dunlop, but as he clicked through the Bungalow time split, his Paton suffered a mechanical issue and he was forced to pull out.
This released Browne into a 12.1s lead over Hickman at the start of the second lap, with the Irishman easing away on his Burrows Engineering-run Paton.
Ending the second lap 14s ahead of Hickman, a clutch issue forced Browne to pull out at the start of the final lap.
Hickman, on a Yamaha some 10mph slower than the Patons, had no dramas over the final tour to take the chequered flag 47.784s ahead of Pierre Yves Bian – the Frenchman celebrating his first TT podium.
Having been dropped out of the podium fight after a bad fuel stop at the end of lap one, Josh Brookes found himself third for his maiden TT rostrum on the Dafabet Kawasaki.
Stefano Bonetti was fourth on the leading Paton at the finish, with Rob Hodson rounding out the top five.
Early podium contender Dom Herbertson was a retirement on lap three.
Picture credit @ttracesofficial/Pacemaker Press