The 21-year-old Brit was continuing her comeback after being sidelined with glandular fever for two months, but she was overpowered in the first set by the American teenager.
Watson fought back in the second to move 4-2 ahead, but her 18-year-old opponent was displaying some huge power from all parts of the court, and she won five of the last six games to record a 6-3 7-5 triumph.
Read below to see how the action unfolded on court two at SW19.
11.33amWhat better way to get day two underway than a match involving a Brit? Heather Watson will be looking for an all-important win to kick-start her 2013, but she is facing a dangerous opponent in Madison Keys.
11.35amWatson's year has been hindered after suffering a bout of glandular fever that forced her to remain on the sidelines for two months. She returned at last month's French Open but after managing to get just five matches under her belt ahead of Wimbledon, she is still easing her way back into top form.
11.38amThe 21-year-old would have been hoping for an easier start to her Wimbledon campaign as he looks to build on her appearance in the third round last year, as Madison Keys is a player who looks to have all the credentials to make an impact on the WTA Tour. She may only be 18, but she has already moved up to number 52 in the world rankings.
11.40amThe players have finished their warm-up, and we are all ready to go. It's important that Watson makes a fast start in this match because she doesn't want to give Keys an opportunity to express herself. It will be Watson to serve first.
Watson *1-0 KeysWatson begins the opening point well, forcing Keys to net, and two strong first serves see her move into a 40-0 advantage. Wow, that's superb from Watson, who ends the game with an ace. Talk about making a statement.
Watson 1-1* KeysKeys steps into the court to put away a winner for her first point of the match, and that lead is extended when Watson goes long. The Brit hits back with a deep return off a second serve, but Keys is displaying some huge power behind her first, reaching as high as 120mph. She has two game points, but Watson replies with a superb cross-court forehand. Keys ends the game with an ace to hold serve.
Watson *1-2 KeysBREAK! The American looks some talent, consolidating her defensive play with some aggressive hitting, and a fine forehand down the line brings up 0-30. Watson then nets to hand Keys three break points, and she takes full advantage with a backhand winner.
Watson 1-3* KeysKeys is dominating this match, and Watson is struggling to get a point on the board. Another ace for Keys makes it 30-0, and a kick-serve has too much on it and Watson nets. Keys makes an error to allow Watson a glimmer of an opportunity, but she sees out the game.
Watson *2-3 KeysThat's much better from Watson, who follows a forehand winner with an ace out wide. Keys then goes long on a return off a second serve, and Watson ensures that she remains competitive in this set when the American nets from the baseline.
Watson 2-4* KeysA fine serve down the middle sees Keys win the opening point, but Watson responds by forcing her opponent into an error. Two more blistering serves take Keys to two game points, and she maintains her advantage with another kick-serve that Watson can't handle.
Watson *3-4 KeysKeys makes two unforced errors to gift Watson 30-0, but the Brit then misses with an ambitious lob on the half-volley. Watson moves to game point when Keys can't return a first serve, but the 21-year-old nets twice to allow the American back to deuce. Key moments for Watson coming up, but she hangs tough to hold and remain in the set.
Watson 3-5* KeysWatson starts this game much better, forcing Keys into two errors on the opening three points, but she then gifts the American parity when she nets from the baseline. However, the Brit earns her first break point after another Keys mistake, but the American thunders down a first serve that Watson sends wide. A double fault gives Watson another chance, but a stunning ace saves it, and Keys eventually sees out the game. That was more encouraging from Watson.
Watson *3-6 KeysBREAK AND SET! Watson comes out on top in the opening rally, but she is in trouble at 15-30 after two unforced errors. A double fault doesn't help matters, and Keys has two set points. Watson saves the first, but she concedes the first set when she sends a topspin forehand into the bottom of the net.
Watson 3-6 1-0* KeysBREAK! A wayward start to the second set from Keys hands Watson 0-30, and although the Brit struggles to put away the next point, Keys goes long with a lob and out of nowhere, the 21-year-old has three break points. Keys saves the first, but some phenomenal defensive work from Watson seals the break, and that's a fine response to going a set behind.
Watson *3-6 1-1 KeysBREAK! Watson needs to capitalise on that game, but she lets off the American with two clumsy shots and she is down 0-30. However, she responds in fine style, driving a cross-court winner before peppering the American from the baseline to force the error. She can't continue the momentum, though, and Keys breaks back when Watson nets twice in succession.
Watson 3-6 2-1* KeysBREAK! This match is beginning to become littered with mistakes, and this time, it's in Watson's favour, as a Keys double fault contributes to falling 0-30 behind. A Watson winner then brings up three more break points, and a perfectly-struck drop shot earns Watson another break. That's four breaks of serve in a row.
Watson *3-6 3-1 KeysWatson takes the opening point, but Keys lets go with a stunning return of serve. However, Watson maintains her composure with two superb serves out wide to bring up game point, and the first service-hold of the set is complete with a third.
Watson 3-6 3-2* KeysIt is going to be interesting how Keys responds to Watson's improvement because she isn't the same player who comfortably won the first set. She does show plenty of class to ease through this service game, however, and she reduces the deficit to one.
Watson *3-6 4-2 KeysDanger signs for Watson, as Keys displays her power once more with two aggressive winners from inside the baseline. The Brit hits back with two unreturnable serves, but that's quite ridiculous from Keys, who hits an unbelievable forehand winner on the back foot. This game is hotting up now, as Watson saves the break point with a drilled baseline winner of her own. What a fantastic hold of serve from Watson, who forces Keys into two mistakes and she maintains her advantage. That was huge.
Watson 3-6 4-3* KeysA comfortable service-hold from Keys, but I guess that was to be expected after Watson's efforts of holding serve in the previous game. An important 10 minutes coming up.
Watson *3-6 4-4 KeysBREAK! A loose start from Watson, who concedes a double fault on the opening point, and a majestic backhand winner from Keys gets her to 0-30. Watson responds with an ace down the middle, but the American lets go with another backhand winner. Is she really 18? Crazy. She's absolutely battering Watson from the baseline, and she breaks back.
Watson 3-6 4-5* KeysWatson has been second best in the past two games, and she desperately needs to stop the rot because Keys is playing with plenty of confidence. The Brit does get to 30-30, but two massive aces from the American take her one game away from the second round.
Watson *3-6 5-5 KeysA few big moments coming up for Watson, but a fine forehand winner from inside the court eases matters and take her to 30-0. A weak drop shot hand the Brit three game points, and that's terrific tennis from the 21-year-old, who moves her opponent around the court before sending a backhand down the line.
Watson 3-6 5-6* KeysMore encouragement for Watson, who wins the opening point, but again, the power and accuracy that Keys is finding with her serve is terrifying for someone who is 18, and she eases through the game with a couple of quick points. Watson will return to serve to remain in the match for the second time.
Watson *3-6 5-7 KeysBREAK AND MATCH! A bit more tactical nous from the American, who sends a tame cross-court shot over the net to move to 0-15, before benefiting from a lucky net-cord. Keys brings up three match points when Watson nets. What an unbelievable end, as the 18-year-old catches the net-cord once more, and Watson bows out of Wimbledon.
1.01pmThat was disappointing for Watson, but no-one can deny that Keys deserved the win. The Brit might receive criticism from some quarters who aren't aware of the American's talent, but I think we have been witnessing a future world number one in the past hour-and-a-half.
1.03pmThat will be all from this encounter, but please stick around for what is a packed day at Wimbledon, with Serena Williams beginning her campaign on centre court in the next few minutes. Goodbye for now.