The 16th seed lost 6-3 4-6 7-5 to Croatian teenager Donna Vekic – one of the rising stars of the circuit – in a hard-fought match lasting more than two and a half hours.
Watson gave up 14 break points and lost her serve to Vekic seven times en route to her early exit from the tournament.
Another surprise casualty at Charleston was Zarina Diyas, as the 11th seed from Kazakhstan lost to Czech qualifier Lucie Hradecka but was beaten 4-6 6-1 6-3.
Two of the other seeds in action, Irina-Camelia Begu and Mona Barthel both progress in straight sets to the next round.
Begu, seeded 13th, required two hours and a second-set tie-break to win 6-2 7-6 (7-5) against German qualifier Laura Siegemund, who had hammered Japanese veteran Kimiko Date-Krumm 6-0 6-1 to reach the tournament proper.
Barthel, two places lower than Begu in the seedings, broke serve four times in a 6-3 6-3 win over Hungary’s Timea Babos.
Chanelle Scheepers of South Africa won 6-2 2-6 6-4 against New Zealand’s Marina Erakovic while Croatian Ajla Tomljanovic beat Romania’s Alexandra Dulgheru 7-6 (7-5) 4-6 6-4.
There was an easier time for Diyas’ Kazakh compatriot Yaroslava Shvedova, who beat Switzerland’s Stefanie Voegele 7-5 6-2.
The two all-American ties ended with Lauren Davis beating Grace Min and wildcard Sachia Vickery victorious against qualifier Jessica Pegula, both in three sets.
Shelby Rogers brushed aside Spain’s Silvia Soler-Espinosa 6-3 6-1 but Irina Falconi was dismissed just as comfortably by Tatjana Maria of Germany and Nicole Gibbs and Christina McHale lost in straight sets to Shuai Zhang and Danka Kovinic respectively.
Kristina Kucova beat Mirjana Lucic-Baroni while Evgeniya Rodina saw off Yulia Putintseva.