Italian Andreas Seppi came from 4-1 down in the first set against Kyrgios, who failed to convert three set points at 5-3, before closing out a 7-6 (7-5) 6-1 triumph.
The Australian threw in an underarm serve during the first set and cited shoulder discomfort as a factor in his collapse.
"I was battling with a bit of a shoulder/collar bone injury," he said. "At this rate, I'm not thinking about playing until the front of my shoulder feels better."
Kyrgios reported the joint had been "clicking" during the Seppi match and, when asked whether he might sit out the rest of the season, he replied: "For sure, I mean at this rate I wouldn't be surprised.
"I wasn't able to even serve at a reasonable pace. I'm probably not going to bother playing until I can get it right again."
France's Lucas Pouille was another seed to depart as he had no answer to a supreme serving display from Soonwoo Kwon.
Kwon only lost six of 41 points on his first serve and won 7-6 (7-4) 6-2 to set up a meeting against fellow qualifier Damir Dzumhur.
No.8 seed Albert Ramos-Vinolas came through a sound examination against Miomir Kecmanovic, saving four set points in the opener before prevailing 7-6 (7-2) 6-3.
Serbian Kecmanovic served at 40-0 with the first set 5-4 in his favour but could not shake off his Spanish opponent, who next meets Gail Monfils - a 5-7 6-3 6-4 winner in an entertaining encounter with Britain's Cameron Norrie.
At the Chengdu Open, Denis Shapovalov served 16 aces and saved all nine break points he afforded Ricardas Berankis in a 6-4 6-3 victory.
Canadian Shapovalov's prowess on serve was rivalled by Alexander Bublik's 25 aces in a 4-6 7-5 7-5 win against the sixth seed Taylor Fritz, where he won 83 per cent of his first-serve points.
Jordan Thompson is up next for Bublik after outlasting Vasek Pospisil 6-3 3-6 7-5 in a match clocking in at two hours and 29 minutes, while Portugal's Joao Sousa set up a meeting with No.2 seed Felix Auger-Aliassime despite a rocky start versus wildcard Hyeon Chung.
Chung stormed to the first set in only his second tour match since a back injury in February but subsided 1-6 6-3 6-4.