Up a set and 6-5, Osaka had the chance to close out the third-round contest before the four-time Major champion suffered an epic meltdown on Arthur Ashe Stadium, where fans booed the titleholder.
Osaka – typically reserved and quiet but in the spotlight amid her mental health concerns after withdrawing from the French Open, having skipped Wimbledon – threw her racquet three times in the unsuccessful second-set tie-break on Saturday (AEST).
The Japanese star received a warning after hitting a ball into the crowd in the final set and while she tried to dig herself out of a hole, 18-year-old Canadian Fernandez completed a stunning upset in New York.
Fernandez showed no fear in her first career meeting with Osaka, going toe-to-toe against the former world No.1.
There were no breaks of serve through nine games, Osaka serving to stay in the set at 5-4 and she did so easily before flicking the switch.
Osaka broke to love in the very next game, reeling off nine successive points to take the opening set.
In the third round of the US Open for the first time and with a 1-2 record against top-10 players, Fernandez was not overawed on the big stage.
Behind her big first serve and powerful baseline hitting, Fernandez ensured the second set followed a similar pattern as Osaka was prevented from racing away with the match.
It appeared as though the second set would go down the same path as the first after Osaka broke for a 6-5 lead.
But Osaka imploded on centre court . After failing to serve out the match, she lost her composure in the tie-break, throwing her racquet on numerous occasions as Fernandez forced a deciding set with ease.
Osaka immediately left the court and emerged with a towel over her head before the start of the final set, however, she still looked off her game, broken in the opener.
Continuing to struggle, Osaka was then given a warning for hitting the ball into the crowd, though she boosted her confidence by holding serve and avoiding falling 3-0 behind.
But Fernandez's sole break point was all she needed, sending the defending champion home, much to the delight of the crowd.