The number three seed lost out to German Sabine Lisicki - ranked number 62 - 6-3 4-6 6-8 in 2 hours 11 minutes of play.
Speaking to the BBC after the match, Lisicki said she was "over the moon" to have defeated the French Open winner. "It's just amazing," she said. "I had a great welcome from the crowd here. They helped me when I was two match points down... I appreciated it so much."
Lisicki, 21, has had a year blighted by injury, having left the US Open in a wheelchair and being stretchered off from the French Open.
She will now face Japan's Misaki Doi in the third round.