In a hard-hitting encounter that lasted over four hours and 40 minutes, Fernando Verdasco came roaring back into the game after losing two sets to Nadal, striking an incredible 90 winners in the process.
Verdasco avoided going 3-0 down in the decider by saving a break point, before going on to win 7-6 (8-6) 4-6 3-6 7-6 (4-7) 6-2.
Seven years ago, Nadal outlasted Verdasco in the longest Australian Open match in history: five hours, 14 minutes.
But Fernando's physical performance on Tuesday left the 14-time Grand Slam winner stunned:
"There are no balls that you can prepare the point. The game has become a little bit more crazy in this aspect", Nadal said after the match.
"I was practising a little bit different, trying to be more aggressive. I can play defensive or offensive. But if you stay in the middle, then I am dead."
Meanwhile, 32 year-old Verdasco, who is currently ranked 45th, was also surprised by the result:
"I think I played unbelievable in the fifth set....I kept hitting winners...I don't know how."
The most significant upset of the Australian Open so far marks a reversal of the normal pattern for Nadal, who has become famous for thriving in battles of will and endurance.
But the "King of Clay", nine-times winner of the French Open, lacked his usual panache :
"He played better than me. He was more aggressive than me. He took more risks than me."
Nadal's early exit was not the only surprise on the second day of the competition.
In the women's tournament, eighth seed Venus Williams was ousted by 24-year old Johanna Konta, who currently holds the 47th place in the world rankings.
Venus Williams triumphed at the Wuhan Open three months ago, but on Tuesday the 35 year-old was outclassed by Konta in two sets 6-4, 6-2.
Konta, who reached the last 16 at the 2015 US Open, is the only British woman left in the singles draw following Heather Watson's defeat on Monday.
The Australian-born Briton said that Williams' age was irrelevant, given the American's experience and knowledge.
"Even if she's playing with one leg out there, you've got to really take care of things on your own because she's an incredible player. I have all the respect for her in the world."
Second seed Simona Halep was also sent crashing out in the first round, after a surprise defeat by China's Zhang Shuai, 131 spots below her in the world rankings.
The 24-year-old Romanian, who is currently nursing an Achilles injury and suffering from a cold, struggled to contain Suai's offensive performance on Margaret Court Arena.
After racing to 3-0 lead in the first set, Zhang Shuai won the contest 6-4, 6-3.
"Beating a top two player... I'm so excited" Shuai rejoiced after the match. "So happy. Today is the best moment of my career."