The Oilers fell to 13-9-2 and were unable to improve upon their one point lead over Minnesota in the Western Conference's Northwest Division. Colorado (12-11-2) climbed over the .500 mark and moved out of last place in the Northwest, two points up on Calgary and now just two back of the Oilers in the hotly contested divisional.
Ken Klee had three assists and John-Michael Liles had a goal and two assists for the Avalanche.
Marek Svatos, with two, Paul Stastny and Milan Hejduk also scored for Colorado.
Joffrey Lupul, Ryan Smyth and Jarret Stoll replied for Edmonton.
The Oilers opened the scoring 1:22 into the game when Raffi Torres shook off a check and fed the puck to Lupul for an easy tap in. It was Lupul's 100th career NHL point.
The Avalanche responded quickly with two goals in less than three minutes. Liles tied the game with a slapshot from the left circle. Oilers goalie Dwayne Roloson got a piece of the shot, but the puck trickled into the net.
Arnason gave Colorado a 2-1 lead when picked up the puck in front of the Oilers net, quickly spun around and roofed the puck over Roloson.
Edmonton tied the game just over 11 minutes into the first as Shawn Horcoff sprung Smyth on a breakaway, and he was able beat Peter Budaj through the pads for his 16th goal of the season and 250th of his career.
Colorado ended the high-scoring first with two late goals. Rookie Stastny tipped a Liles shot past Roloson with the teams playing four on four after both teams took too many men penalties. Arnason followed with his second of the night to give Colorado a 4-2 lead. Roloson allowed four goals on his first 10 shots.
The Avalanche struck 34 seconds in the second period as Hejduk rifled a shot over Roloson's right shoulder.
Svatos followed with his first of the game midway through the period, chasing Roloson from the Edmonton net. Jussi Markkanen came on in relief.
Svatos scored his second goal in the third period, stealing the puck at the blue-line and deking past Markkanen.
Stoll capped the scoring for the Oilers with the game well out of reach.
The seven goals allowed by the Oilers is the most they have surrendered since a 7-1 loss to Colorado Avalanche on Oct. 21 2005.
Notes: This was the third of eight meetings between the divisional rivals this season and the first of the year at Rexall Place. Edmonton won the two previous meetings between the two teams, both one-goal victories in Denver. . . . The Oilers still had no official word on the expected length of time forward Ales Hemsky is expected to be out of the lineup. Hemsky suffered an injury to his right shoulder on Tuesday after a hit by Anaheim's Sean O'Donnell. Rookie Marc-Antoine Pouliot
took his place. . . . Edmonton defenceman Steve Staios returned to the lineup after missing the last two games with a knee injury. The two missed games were the first for Staios after playing 224 consecutive games dating back to the 2002-03 season . . . Stastny is second on the Avalanche and third among NHL rookies in points, while teammate Wojtek Wolski has 16 points to rank fourth among rookies.