Williams is set to lose her number one ranking to Jelena Jankovic
Serena Williams suffered a stunning collapse in the second round of the Porsche Grand Prix in Stuttgart, losing to China's Li Na 0-6 6-1 6-4.
The defeat means Williams will lose her world number one spot to Serbia's Jelena Jankovic when the new rankings are released on Monday.
Earlier, Switzerland's Patty Schnyder beat fifth-seeded Russian Svetlana Kuznetsova 6-4 4-6 7-5.
Schnyder is seeking her second title of the year after winning in Bali.
Williams was bitterly disappointed with her performance, saying: "I didn't play well at all. I started off really solid then my level dropped.
"In the third set she played really well and I didn't, and that was the difference. If you make that many unforced errors like I did at the end, you don't deserve to win the match."
Williams was also realistic about losing her top ranking, adding: "To be quite honest I don't deserve it playing like that; I have to step it up and I will.
"I've been number one before and held it for a long time, so I know how that feels. At this stage of my career the titles are what matter to me - like this tournament.
"Winning the US Open this year and returning to number one after five years was an absolute highlight. I want to try and finish the year in that position."
American Williams only took over the top spot when she beat Jankovic in the final of the US Open three weeks ago.
Williams, who received a first-round bye, seized on a series of errors from her unseeded opponent to take the first set in 21 minutes.
But Li found her range in the second set, hitting the lines more frequently and putting Williams under increasing pressure.
Williams made 11 unforced errors in the second, dropping her serve twice along the way.
Li broke for 4-3 in the decider and while Williams saved three match points in her next service game she was unable to stop her opponent serving out for the match.
Seventh-seeded Vera Zvonareva advanced to the second round by beating Daniela Hantuchova of Slovakia 6-3 6-2.
Russia's Zvonareva won Olympic bronze in Beijing and also won in Guangzhou, her second title of the year.