World number five Capriati, who had benefited from a bye in the first round, was beaten 4-6, 6-4, 7-6 by Russia's Elena Bovina, losing the third set tiebreak 7-3.
The Russian, ranked 32, was eager for revenge after losing to the American 4-6, 7-5, 6-4 in the second round of the Pilot Pen tournament in New Haven two months ago. On that occasion Capriati had gone on to clinch her first title since last year's Australian Open.
"The previous match with Jennifer was the best of my life, but I was really upset after I lost and today I was eager to gain revenge for that as soon as possible," Bovina said later.
The 20 year-old Muscovite saved a match point in the ninth game of the final set before claiming a memorable victory after two hours and four minutes.
"She is a tough player to play because you really don't know what she is going to do," conceded Capriati. "She hits some unbelievable shots."
Capriati was a late addition to the field in a bid by organisers to make the $2.3 million tournament more attractive for spectators following the withdrawals of her compatriots Lindsay Davenport and Venus Williams through injuries.
After winning the first set 6-4, Capriati took a 4-3 lead in the second and seemed to be on track for a comfortable victory.
In the decider, Capriati again took control, forging 5-3 clear before wasting a match point in the ninth game.
Bovina became the first player to move into Friday's quarterfinals, where she will meet either Israel's Anna Pistolesi or fellow Russian Svetlana Kuznetsova.
Second seed Amelie Mauresmo of France joined Bovina in the last eight after overpowering American Alexandra Stevenson 6-3, 4-6, 6-3 on the centre court.
The exodus of seeded players continued on the men's side with two Spaniards, Felix Mantilla and Feliciano Lopez, joining top seed Sjeng Schalken on the sidelines.
Third seed Mantilla fell to a 6-2, 6-0 defeat by American Taylor Dent in the first round, while seventh seed Lopez was bundled out by defending champion Paul-Henri Mathieu 6-1, 6-4.
Dutchman Schalken, last year's Kremlin Cup finalist, was beaten by Russian qualifier Igor Andreev 6-3, 6-1 in the first round on Monday.
