Second on the grid Kallio had snatched the lead into turn one, but pole sitter Bautista and ninth placed starter Simoncelli soon found their way around the Finn and began to break away.
The surprising Simoncelli continued to shadow home hero Bautista's every move - as they enjoyed an ever growing lead of over six seconds by the halfway stage of the 26 laps - until eight to go, when Simoncelli suddenly threw his Metis Gilera past the Mapfre Aspar Aprilia.
Bautista struck back and had regained control by the end of the lap, but couldn't shake off the determined Simoncelli - who later brushed Bautista's front wheel as he accelerated past the Spaniard along the home straight with three laps to go.
Simoncelli then let Bautista back ahead at the final turn and the last lap began with the pair almost inseparable - and then literally inseparable, as Simoncelli rode into the back of Bautista mid-corner, taking them both down!
An engine problem was later revealed to have caused Bautista to slow, but Simoncelli had nonetheless offered an animated apology as they walked through the gravel - a wise move considering the 130,000 Spanish fans upset by the collision.
Kallio was thus left to inherit victory, with Qatar winner Mattia Pasini passing Yuki Takahashi on the run to the line to claim a shock second position.
Several laps before the Bautista/Simoncelli drama, Thomas Luthi suffered a huge highside from what would have become second position.
Race results - Jerez:
1. Kallio (KTM)
2. Pasini (Aprilia) +4.277secs
3. Takahashi (Honda) +4.287secs
4. Aoyama (KTM) +4.876secs
5. Barbera (Aprilia) +5.968secs
6. Debon (Aprilia) +13.633secs
7. Simon (KTM) +16.372secs
8. Locatelli (Gilera) +22.571secs
9. Espargaro (Aprilia) +28.606secs
10. Pesek (Aprilia) +32.726secs
Laverty (Aprilia) DNF