The world number one and top seed was overwhelming favourite to win her 22nd Grand Slam title at Melbourne Park, but an error-strewn performance handed the German a stunning 6-4, 3-6, 6-4 victory.
It stopped Williams matching Steffi Graf's Open-era record of 22 Grand Slam titles, which will now have to wait at least until the French Open in June.
The 34-year-old, who had won all six of her previous Melbourne Park finals, was the defending champion and won three Grand Slam titles last year. But she said she was not infallible.
"It's interesting. I mean, every time I walk in this room, everyone expects me to win every single match, every single day of my life," she said at her post-match press conference.
"As much as I would like to be a robot, I'm not. I try to. But, you know, I do the best that I can.
"I try to win every single time I step out there, every single point, but realistically I can't do it. Maybe someone else can, but I wasn't able to do it."
Williams' tilt at another title was ultimately undone by 46 unforced errors to Kerber's 13.
Twenty-three of them came in the opening set as she uncharacteristically sprayed balls wide and long, while missing almost half of her shots from the net.
- Record no distraction -
"I was missing a lot off the ground, coming to the net. She kept hitting some great shots actually every time I came in," Williams said.
"I think I kept picking the wrong shots coming into it. But, honestly, it's something to learn from, just to try to get better."
While her mistakes helped Kerber, the German also played some scintillating tennis off the baseline and Williams paid tribute to her never-say-die attitude in pressing so hard for her first ever Grand Slam title at the age of 28.
"I was actually really happy for her. She's been around a really long time. We've had a number of matches. I've beaten her a lot," said Williams, who had a 5-1 record against Kerber before the Melbourne final.
"She played so well today. She had an attitude that I think a lot of people can learn from: just to always stay positive and to never give up.
"I was really inspired by that. If I couldn't win, I'm happy she did."
Williams made clear during the tournament she was trying not to think about Graf's record, but she denied that nerves about equalling the milestone played a part in her defeat.
"Once it got started, it was so intense from the beginning till the end that I didn't really have time to be nervous," she said.
"No, I didn't think about the record at all. I think more or less I thought just about winning this match. It wasn't necessarily the record for me."