Capriati, the two-time defending champion, was topped by Marlene Weingartner of Germany.
The third-seeded Capriati became the first defending champion ousted in the first round of the Australian Open with a 2-6, 7-6 (8-6), 6-4 loss in the first evening match at Rod Laver Arena.
Steffi Graf was the last women's title holder to lose in the first round of a Grand Slam when she fell to Lori McNeil at Wimbledon in 1994.
Capriati came into the season's first Grand Slam in poor form, having lost her only match of the year at the warm-up event in Sydney last week. Her preparations for the new season were restricted by operations to both her eyes a week after the 2002 season-ending WTA Championships in Los Angeles.
"I would have to say the recovery time wasn't enough, and I feel like I just didn't give myself enough chance to fully prepare," she said. "Probably, if I wasn't the defending champion, I wouldn't have shown up. I probably should have considered that."
Capriati had pterygium removed. Pterygium is a growth of scar tissue and blood vessels on the sun-exposed surface of the eye.
The condition is caused from excess exposure to the sun, and makes vision cloudy.
"I think they're OK now," Capriati said of her eyes. "I'm getting back to feeling normal again. I would say a few weeks, maybe a month. I had the procedure done a week after I played in LA. I had pterygiums removed in both eyes and had stitches in both eyes. For two weeks, basically, I was in the dark because I couldn't be in the sunlight because my eyes were too sensitive. I'm not trying to make excuses, that's for sure, but I have to say it had a lot to do with my preparation for coming here."
Capriati has not won a tournament since the Australian a year ago, when she overcame excessive heat and Martina Hingis to win her third Grand Slam crown. She became the first woman to save four match points in a final of a major.
"In a lot of ways, I'm disappointed of course, but I've got to look on the positive side," she said. "I came here as defending champion and maybe I didn't feel quite myself, but I put myself on the line anyway, and I have to give myself credit for that, even if I went out the loser."
Capriati looked to be in charge against the 90th-ranked player in the world. She won the first set easily and owned a 4-2 advantage in the second, but soon wilted in the heat and humidity.
"Physically, I felt I started to get a bit tired (in the second set) and she just got on a roll there," Capriati said. "I felt the momentum swing and physically and mentally I wasn't quite there I guess."
Weingartner won the second set in a tiebreaker, and broke serve in the final game to record her first victory over Capriati in two meetings.
Other men's seeds in the top 16 winning on day one were No. 2 Andre Agassi, No. 4 Juan Carlos Ferrero, No. 5 Carlos Moya, eighth-seeded Albert Costa, No. 11 Paradorn Srichaphan, No. 12 Sebastien Grosjean, 14th-seeded Sebastien Grosjean, and No. 16 Sebastien Grosjean.
Joining them among the top 16 on the women's side were second-seeded Venus Williams, No. 5 Justine Henin-Hardenne, No. 7 Daniela Hantuchova, ninth-seeded Lindsay Davenport, No. 12 Patty Schnyder, No. 13 Sylvia Farina Elia, and 16th-seeded Nathalie Dechy.
While not in a position to win a legitimate Grand Slam (all four major tournaments in the same calendar year),Williams is trying to become the first woman to win four consecutive majors since Graf in 1993-94. Her 15 straight-set Grand Slam match winning streak is the most dominant since Graf's run of 20 in 1988.
Williams' only loss in her last four majors was a final setback to older sister Venus in the 2001 U.S. Open. After missing last year's Australian Open with a right ankle injury, Serena avenged the defeat by beating her sibling in the finals of the French Open, Wimbledon and the U.S. Open.
The 21-year-old, who won a WTA Tour-best seven titles last season, opened 2003 with a 4-0 record to help lead the United States to the Hopman Cup crown two weeks ago.
Lleyton Hewitt, the men's top seed and local hope, is in action Tuesday, taking on Swedish qualifier Magnus Larsson.
Hewitt is trying to become the first Australian male to win this event since Mark Edmondson in 1976. His best performance at the Australian Open was a fourth-round showing in 2000. Last year, suffering the aftereffects of chicken pox, he became the first top seed in the Open era to lose in the first round.
The 21-year-old from Adelaide won five titles and finished 2002 ranked No. 1 for the second season in a row. He claimed his second career Grand Slam crown at Wimbledon.