The world No.29, who is the No.3 in Buenos Aires, lost 4-6 6-3 6-1 against the 22-year-old world No.137.
The first flashpoint came in the second set with Paire leading 40-15 on Cerundolo's serve, having been broken in the previous game.
The 31-year-old was angered when a Cerundolo serve down the middle was deemed an ace.
Paire argued furiously with Spanish umpire Nacho Forcadell that it should have been called wide, pointing to a mark on the clay surface but failing to convince the official.
The Frenchman then spat on the mark and shouted obscenities before he was given a warning by Forcadell.
Although he won the next point to break back, Paire was docked a point a couple of games later after again spitting and arguing with Forcadell.
Paire called for the tournament supervisor, Jorge Mandl who tried to calm the Frenchman, but to no avail.
Ever more mistakes crept into the riled Frenchman's game and at 5-1 down in the third and final set, he appeared to give up and 'tanked'.
Two mistakes left him trailing 0-30, after which he served two wild double-faults, seemingly deliberately.
He even hit his final serve of the match while a ballboy was still on court recovering his first service ball.
Soon after his match, Paire left a message on Twitter showing his career earnings of more than $US8.5 million ($11 million) with the words: "In the end it's useful to be useless."
Finalement ça vaut le coup d’être nul 😘🖕🏻 pic.twitter.com/PbWsGQLa1A— paire benoit (@benoitpaire) March 4, 2021
Cerundolo, whose brother Juan Manuel won the Cordoba Open in Argentina last week, will face No.6 seed Pablo Andujar in the quarter-finals after the Spaniard beat Italian Gianluca Mager 6-4 7-6 (7-5).