The Russian made a confident start in Montreal, but Melzer kept pace in a tight first set.
Youzhny eventually wrapped up the opening set with a single break of serve, claiming the advantage after holding firm in a series of lengthy baseline exchanges.
Melzer responded by putting pressure on his opponent in the second set on Court Five, holding serve to keep the match alive.
A stalemate forced the second set to a tie-breaker, with Youzhny reacting quickest to build a 6-1 lead and earn five match points.
Melzer delayed the defeat by saving two match points, but eventually succumbed as Youzhny secured a 6-4 7-6(3) success.