Shepherd was beaten by John Part in last year's final
Last year's runner-up Kirk Shepherd crashed out of the PDC World Championship at the first hurdle after losing 3-2 to Jan van der Rassel.
Shepherd has struggled over the year to replicate the form that got him to the final, but fought back from 2-1 down to force a decider before losing out.
"I'm gutted to lose but with an average of 83 you are not going to win many matches," he said.
Third seed James Wade had no such trouble in beating Brendan Dolan 3-0.
Shepherd, who at 21 became the youngest finalist in the event's history when he lost to John Part, led 2-1 in the opening set before his Dutch opponent won the next two legs with finishes of 98 and 97 to take an early advantage.
Shepherd, who had beaten Van der Rassel in their two previous meetings, recovered to take a 1-0 lead in the second set with a 13-dart finish, and took the set 3-1 to level the game.
Although the Kent player went 1-0 and 2-1 up in set three, Van der Rassel battled back to hold throw in the deciding leg, hitting double 10 to regain the lead before Shepherd took the fourth set 3-0 to send the game into a decider.
Van der Rassel kept his cool in the final set, taking out 106 for the match to set up a meeting with compatriot Jelle Klaasen in the last 32.
Wade struggled at times in the opening set of his match against Dolan but sealed it with a 106 checkout and dominated after that, losing just one more leg.
He will next face Tony Eccles, who survived a spirited comeback by Remco van Eijden, the conqueror of Anastasia Dobromyslova in the preliminary round, to win 3-2.
The 15th seed Ronnie Baxter came from a set down to beat Finland's Marco Kantele 3-1, while the 14th seed Colin Osborne also advanced thanks to a 3-0 success over South Africa's Charles Losper and will next play Vincent van der Voort who got past Hungary's Nandor Bezzeg 3-0.
Australia's Paul Nicholson produced a near flawless display, winning all nine legs to beat Adrian Gray 3-0 and set up a meeting with Adrian Lewis in round two.
But Andy Smith, the 26th seed, crashed out in the first round for the second successive year after being beaten 3-2 by qualifier Tony Ayres.
The tournament now takes a three-day break for Christmas before resuming on Saturday, 27 December.