The third seed, whose preparation was hampered by a thigh injury, was always trailing against the 88-ranked Hsieh Su-wei from Taiwan before being edged out 7-6 (7/1), 6-4 in one hour and 59 minutes on Rod Laver Arena.
“I maybe could have done things better, but at the end, she deserves to win. That’s really it,” Muguruza told reporters.
Two-time Grand Slam champion Muguruza struggled from the start to keep pace with the tenacious 32-year-old whose last WTA Tour singles title came at Guangzhou back in 2012.
The tall Spaniard had a medical timeout at 2-5 in the first set and after having a blistered foot re-taped looked briefly regalvanized.
Muguruza said her feet were suffering in the heat as temperatures soared above 39 Celsius (102 Farenheit).
“I think the surface of the court, I don’t know how much heat, it’s terrible, very, very hot, and it’s easy to get blisters and red,” she said.
“I don’t think that was the reason why today it didn’t go my way. It was already wrapped (foot), but very quickly I started to feel a blister was coming, and I’d rather prevent it than having the problem after.”
Muguruza then broke back twice but Hsieh, who works closely with former Australian Open tournament director Paul McNamee, ran away with the tiebreak 7-1.
“He’s always been around me and supported me and was amazing,” she said of McNamee’s influence.
“My goal to hire him at the beginning was to win a Grand Slam,” she added.
Muguruza saved a first match point in the second set to get back to 5-4 but Hsieh made no mistake in the next game.
“I knew she was going to give me a lot of pressure,” said Hsieh, who was ranked number one in doubles for five weeks in 2014.
“At 5-4 I thought I’d keep hanging there and try and take my spot,” she said.
“It’s never easy to play against top 20 girls. I think mentally for sure they are much better, so when we go on the court we have to forget who we are playing and focus on our game.”
Hsieh, whose previous best at Melbourne Park was a last-16 defeat to Justine Henin 10 years ago, goes on to meet 26th seed Agnieszka Radwanska of Poland in the third round.