The 23-time Grand Slam winner led 5-1 in the third set but eventually lost 6-4, 4-6, 7-5 in the last women's quarter-final.
No. 4 seed Naomi Osaka breezed past Elina Svitolina, winning 6-4, 6-1 in 72 minutes.
Novak Djokovic was only on court for 52 minutes before an exhausted Kei Nishikori retired from their last-eight clash on Rod Laver Arena.
The Serbian world No. 1 will meet Lucas Pouille in the semi-finals after the Frenchman beat Milos Raonic in four sets.
Men's Singles Results
(28) Lucas Pouille bt. (16) Milos Raonic: 7-6 (4), 6-3, 6-7 (2), 6-4
(1) Novak Djokovic bt. (8) Kei Nishikori: 6-1, 4-1 ret.
Women's Singles Results
(4) Naomi Osaka bt. (6) Elina Svitolina: 6-4, 6-1
(7) Karolina Pliskova bt. (16) Serena Williams: 6-4, 4-6, 7-5
Full results and draws can be found at the Australian Open's official website.
Williams was a strong favourite to go all the way this year in Melbourne and match Margaret Court's record of 24 Grand Slam victories.
She had beaten top seed Simona Halep in impressive fashion in the fourth round, and at 5-1 up in the third set against Pliskova, she looked all but guaranteed a spot in the last four.
However, the Czech produced some fantastic tennis to turn the match around, while Serena was potentially hampered by an injury:
The American refused to give any excuses for her defeat, though, crediting Pliskova with turning the match on its head:
There was no such drama in the other women's quarter-final on Wednesday.
Japan's Osaka, the U.S. Open champion, claimed five breaks in the match against Svitolina and hit 31 winners to the sixth seed's 11.
The 21-year-old is arguably now the favourite in the women's draw at Melbourne Park, although Petra Kvitova has also looked in excellent form.
Pouille reached his first-ever Grand Slam semi-final as he beat the big-serving Raonic in just over three hours.
The Frenchman did not make the best start to the match as he trailed 5-2 in the opener. But he battled back to take it in a tiebreak and then claimed the second by taking the only break point of the set.
Canada's Raonic got himself back in the contest by winning the third set in another breaker before Pouille sealed the match in a dominant fourth set performance.
The 24-year-old hailed his coach, 2006 Australian Open winner Amelie Mauresmo, after the victory:
The Rod Laver Arena was prepared for a blockbuster finish on Wednesday with Djokovic versus Nishikori, but it never materialised.
The Japanese eighth seed had driven himself into the ground to make the last eight, playing three five-setters, including a five-hour fourth-round match against Pablo Carreno Busta:
It was immediately obvious Nishikori was struggling physically.
He changed up his usual game, approaching the net more to try to shorten the points.
But he made 28 unforced errors in the match, was broken four times, called the trainer for treatment between sets and eventually conceded defeat at 6-1, 4-1 behind.