Williams won the first set but Ivanovic, capitalising on her poor movement and high error-count, took her first ever set against the top seed and then raced through the decider to win 4-6, 6-3, 6-3.
The shock result robs Williams of the chance to join Chris Evert and Martina Navratilova on 18 Grand Slams, and draw nearer to Steffi Graf's Open-era record of 22.
It also puts paid to her bid -- talked up by her coach, Patrick Mouratoglou -- to win all four Grand Slam titles this year, a feat last achieved by Graf in 1988.
Williams' departure provides a giant opportunity to those left in the draw, including Ivanovic, defending champion Victoria Azarenka and Li Na, who beat Ekaterina Makarova to reach the quarter-finals.
Afterwards, the American world number one confessed that she was on strong medication for a back injury and nearly pulled out injured before her third-round win over Daniela Hantuchova.
"I almost pulled out. I'm such a competitor. I mean, I probably should have," Williams said.
She added: "I made a tremendous amount of errors, shots I missed I normally don't miss, I haven't missed since the '80s. I'm just not used to missing those shots."
Five-time champion Williams has a chequered recent record at the season's opening Grand Slam. Last year, she struggled with an ankle problem before going out in the quarter-finals.


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