The sixth-seeded Stosur, who won the U.S. Open title last year, dropped a 7-6 (7-2), 6-3 decision against Romanian Sorana Cirstea at Melbourne Park.
"I'm not sure if it's one of my biggest matches, but it feels like that now," said Cirstea, who lost her previous two matches against Stosur.
The Aussie favorite Stosur has never advanced beyond the fourth round in Melbourne, but proved to be a Grand Slam contender after reaching the French Open final in 2010.
But Stosur has displayed inconsistent form, and committed 33 unforced errors in Tuesday's loss. She also struck just 12 winners.
Stosur saved three match points, but finally succumbed when one final lazy forehand drifted beyond the baseline.
"Obviously extremely disappointed," Stosur said. "Certainly not [what] I wanted, not just this tournament but the whole summer together. There's not any other word for it but a total disappointment."
An Aussie woman hasn't captured this major since Chris O'Neil back in 1978.
Meanwhile, the 12th-seeded Williams, seeking a 14th major title and sixth Aussie Open crown, erased Austrian Tamira Paszek 6-3, 6-2 in Tuesday's nightcap at Rod Laver Arena. The match was over in 1 hour, 19 minutes, as the powerful American smacked 12 aces among 34 winners and broke Paszek three times.
Williams, however, also piled up 26 unforced errors on Day 2.
Up next for the former No. 1 American star will be Czech Barbora Zahlavova Strycova.
The second-seeded Kvitova is in search of her second Grand Slam title, having won Wimbledon last year. She convincingly beat Russian Vera Dushevina, 6-2, 6-0, in 61 minutes on Tuesday and moved into the second round to face Spaniard Carla Suarez Navarro, who beat Irina-Camelia Begu in her opening match.
The 21-year-old Kvitova reached the quarterfinals in Melbourne last year before losing to Russian Vera Zvonareva, the seventh seed who was a 7-6 (7-4), 6-7 (5-7), 6-3 winner over Romanian Alexandra Dulgheru on Tuesday.
Sharapova, the fourth seed here, needed just 58 minutes to record a 6-0, 6-1 win against Argentine Gisela Dulko. The Russian star won the Australian Open in 2008, but struggled while recovering from injuries the following two seasons. However, she enjoyed a resurgence last year, reaching the fourth round in Melbourne before getting to the semifinals at Roland Garros and losing to Kvitova in the Wimbledon finale.
The three-time major champion and former world No. 1 Sharapova will face American Jamie Hampton in a second-rounder on Thursday.
Ninth-seeded former Wimbledon runner-up Marion Bartoli handled fellow Frenchwoman Virginie Razzano 7-5, 6-0, while German Sabine Lisicki, the 14th seed, advanced with a 6-2, 4-6, 6-4 win against Swiss Stefanie Voegele and 15th-seeded capable Russian Anastasia Pavlyuchenkova bested Czech Klara Zakopalova 7-6 (7-5), 6-1.
Dominika Cibulkova, seeded 17th, leveled fellow Slovak Magdalena Rybarikova 6-3, 6-1, 18th-seeded two-time Grand Slam champion Svetlana Kuznetsova of Russia edged out South African Chanelle Scheepers 6-3, 3-6, 6-0, and 21st- seeded former world No. 1 and 2008 Aussie Open runner-up Ana Ivanovic of Serbia dismissed Spaniard Lourdes Dominguez Lino 6-0, 6-3.
Other seeded victors on Day 2 were No. 23 Italian Roberta Vinci; No. 25 Estonian Kaia Kanepi; No. 27 Russian Maria Kirilenko; No. 29 Russian Nadia Petrova; and No. 30 German Angelique Kerber. Kanepi was a titlist in Brisbane two weeks ago.
Several other women reached the round of 64, including Israeli Shahar Peer, Americans Vania King and Sloane Stephens, Canadian Aleksandra Wozniak, Chinese Zheng Jie, and Aussie favorite Jelena Dokic, who drubbed Russian and fellow former top-10 star Anna Chakvetadze 6-2, 6-1. Zheng drilled American Madison Keys 6-2, 6-1, while King defeated Ukrainian Kateryna Bondarenko 7-6 (7-3), 6-3 and Stephens stopped Spaniard Silvia Soler-Espinosa 6-4, 6-2.
The second round will get underway on Wednesday, including matches for world No. 1 Caroline Wozniacki, third-seeded Victoria Azarenka, fifth-seeded 2011 Aussie Open runner-up and French Open champion Li Na and 11th-seeded reigning Melbourne titlist Kim Clijsters.
The former U.S. Open runner-up Wozniacki will take on Georgian Anna Tatishvili; Azarenka will encounter Aussie Casey Dellacqua; Li will meet Aussie Olivia Rogowska; and the four-time Grand Slam champion Clijsters will battle France's Stephanie Foretz Gacon.
Clijsters beat Li in last year's Aussie finale.
Also on Wednesday's schedule are eighth-seeded Pole Agnieszka Radwanska, 10th- seeded French Open runner-up and 2010 Roland Garros titlist Francesca Schiavone and 13th-seeded former world No. 1 Jelena Jankovic.