Khan was floored three times as American Garcia exploited the Englishman's naive tactics to keep his WBC light-welterweight title and snatch his opponent's WBA belt.
Khan was taken to hospital for precautionary scans after the devastating loss, which was his second in succession after Lamont Peterson's tainted win over him last December.
"It wasn't my night," admitted the Bolton fighter.
"After watching the replays a little bit I thought I was coming in with my hands down and Danny took advantage.
"I respect Danny, he was countering very well against me."
Khan, now 26-3 with 18 early wins and two stoppage defeats, hinted he may have taken Garcia lightly. His tactics backed that up as he tore at his opponent from the opening bell before becoming embroiled in a war which he lost spectacularly.
"We got a little complacent and he took advantage and he caught me," he said of Garcia's decisive left hook that sent him down for the first time.
"I was a little surprised the referee stopped it. I thought he was going to let us continue. My mind was clear and I thought my legs were okay but I respect the referee, the judges and the commission, maybe they made the right call."
Khan, who had perhaps naively talked about fighting Floyd Mayweather in the near future, had the WBA belt he lost to Peterson returned to him this week but lost it again to Garcia at the Mandalay Bay Events Center.
Garcia, now 24-0 (15KOs) said: "I always knew I was going to win this fight and I'm now a unified champion at 140lbs.
"I needed a great fighter in front of me to show how good a fighter I am.
"Now everyone knows. I'm a killer. I will fight anyone, anywhere, anytime.
"I hit him with the same shots I hit Erik Morales with when I won the title last time and that shows you how great a fighter Morales is.
"People said he was old but he took those shots all night long and Khan couldn't take them."
The Philadelphia man added: "We knew Khan was going to come out fast because he thought I had no power but I waited and stepped up to use the power and speed I have, and it worked.
"I was going to fight until the death, just like he did. Now I want to continue to fight the best."
Khan flew out of the blocks and was in control of the early action.
Garcia was trailing - and cut over the eye - when the fight exploded in the third round.
A counter left from Garcia floored Khan hard and he got to his feet quickly but was clearly devoid of his senses.
Referee Kenny Bayless scandalously allowed it to go on - Khan had no idea where he was - and the Briton was saved by the bell as Garcia threw a massive right and a left on the bell had Khan struggling again.
After a minute to recover Khan looked in better shape for the fourth. Garcia threw huge power shots in search of the stoppage and Khan was soon down again, this time from a right, which saw him trip on the rope.
Khan somehow survived and amazingly began firing shots back as the two men stood and traded crashing blows.
Khan briefly had the upper hand, landing a nice uppercut. But he was then down a third time when he was caught by a glancng left and right to the temple.
Again he got up quickly, but when Bayless stared into his eyes, the referee finally decided enough was enough.