Defending champion Naomi Osaka's campaign also came to a premature end as she was downed 6-3, 6-4 by 15-year-old sensation Coco Gauff.
Friday's major upset in the men's draw was sixth seed Stefanos Tsitsipas' 7-5, 6-4, 7-6 (2) loss to Milos Raonic.
There was no such trouble for men's second seed Novak Djokovic, who dispatched Yoshihito Nishioka in his third-round clash, winning 6-3, 6-2, 6-2.
Marin Cilic, meanwhile, ousted Roberto Bautista Agut in an epic five-setter.
Here are some of the headline results from Friday's action:
(2) Novak Djokovic bt. Yoshihito Nishioka: 6-3, 6-2, 6-2
(14) Diego Schwartzman bt. (24) Dusan Lajovic: 6-2, 6-3, 7-6 (7)
Marton Fucsovics bt. Tommy Paul: 6-1, 6-1, 6-4
Marin Cilic bt. (9) Roberto Bautista Agut: 6-7 (3), 6-4, 6-0, 5-7, 6-3
Tennys Sandgren bt. Sam Querrey: 6-4, 6-4, 6-4
(32) Milos Raonic bt. (6) Stefanos Tsitsipas: 7-5, 6-4, 7-6 (2)
(1) Ashleigh Barty bt. (29) Elena Rybakina: 6-3, 6-2
(27) Wang Qiang bt. (8) Serena Williams: 6-4, 6-7 (2), 7-5
(7) Petra Kvitova bt. (25) Ekaterina Alexandrova: 6-1, 6-2
(22) Maria Sakkari bt. (10) Madison Keys: 6-4, 6-4
Ons Jabeur bt. Caroline Wozniacki: 7-5, 3-6, 7-5
(8) Alison Riske bt. Julia Goerges: 1-6, 7-6 (4), 6-2
Coco Gauff bt. (3) Naomi Osaka: 6-3, 6-4
Visit the Australian Open website to see the full results.
UK Replay Schedule (Time GMT)
Eurosport 2 at 5:58 p.m., 6:59 p.m. and 7:59 p.m.
Live Stream: Eurosport Player
U.S. Replay Schedule (Time ET)
ESPN 2 at 2 p.m. and 9 p.m.
Tennis Channel at 1 p.m. And 9 p.m.
Live Stream: Tennis Channel Everywhere
Wang was not expected to cause Williams many problems on Friday, not least because the 23-time Grand Slam champion gave up just one game to her in their only previous meeting at the U.S. Open back in September.
However, the No. 27 seed was superb on Friday, claiming the only break of the first set while saving all four of Serena's break opportunities on her serve.
In the second set, Wang stuttered when serving for the match at 5-4 ahead, and the world No. 9 drew the match level by winning the tiebreak.
There was no capitulation from the underdog, though.
In the third set she served at 74 percent, and did not offer up a single break point.
Instead it was Serena who got frustrated. She made 17 unforced errors in the decider and was broken once to make a rare first-week exit from a Grand Slam:
Gauff continued her meteoric rise with another huge upset with a first career win over Osaka.
As with Wang and Williams, Gauff was thrashed 6-3, 6-0 by Osaka in their only previous meeting at the 2019 U.S. Open.
This time, though, Gauff was nerveless, taking advantage of some uncharacteristically sloppy play from her Japanese opponent and serving brilliantly in the second set to retain control of the match.
Tsitsipas, 21, made the semi-finals of the Australian Open last year and closed out 2019 by winning the ATP Finals.
As such, he arrived at Melbourne Park this year among the favourites to go all the way.
Raonic, though, was in superb form on the Margaret Court Arena and ended Tsitsipas' 2020 Australian Open campaign in two and half hours while not offering up a single break point:
Defending champion Djokovic, meanwhile, needed only 85 minutes to see off Nishioka.
The Serbian was utterly dominant as he claimed five breaks, served 17 aces and hit 40 winners. He will now face Diego Schwartzman in the last 16.