The Orica-GreenEdge rider just held off the formidable challenge of Team Sky's Cavendish, who was led out by Bradley Wiggins and stage one winner Luke Rowe but did not have enough in the tank to take the win on the 180.7-kilometre trek from Nottingham to Knowsley Safari Park.
Holland's Boy Van Poppel (UnitedHealthcare Pro Cycling Team) took third place and with it the lead in the general classification.
Jack Bobridge (Green Edge), Russ Hampton (Raleigh UK), Pablo Urtasun (Euskaltel), Pete Williams (Node4), Richard Handley (Rapha Condor) and Matthias Krizek (Liquigas) formed an early six-man breakaway and soon established a lead of more than three minutes.
Bobridge and Williams then broke clear on their own with 50km remaining, but with around 25km left the peloton had the leading duo in their sights and the anticipated sprint finish was on.
Team Sky dictated the pace with several lone breakaways coming to nothing, and as the stage entered its closing stages it was Tour de France winner Wiggins out front and seemingly poised to tee up sprint expert Cavendish for the win.
Rowe took over the lead-out duties, but when it came to Cavendish's moment to strike, the Manxman appeared to get boxed in and Howard was able to escape.
"With 600m to go I led into it with Cav in my wheel," Rowe told ITV4. "He said he wanted to try and let me go and slip a few wheels back. We knew there was a bit of a dip and he'd use the run.
"Unfortunately on that dip the riders switched from right to left and he got a bit chopped up.
"Cav's shown how fast he was in that finish. It's frustrating but you could see how fast he was coming up at the line."
The eight-stage Tour moves to Scotland Tuesday with the third stage from Jedburgh to Dumfries.