The American, seeded 12th after an injury-hit 18 months which saw her miss last year's event in Melbourne, had not lost here since going down to Jelena Jankovic in the last eight in 2008.
But she was a distant second best against Russian Makarova, who secured the biggest win of her career 6-2 6-3.
A lack of match fitness seemed to catch up with Williams in the blistering heat and world number 56 Makarova was good enough to take advantage.
She broke for a 3-2 lead in the opening set and then again for 5-2 as Williams' usually dominant serve faltered.
Williams improved at the start of the second set as she claimed a 2-0 advantage, but Makarova broke back immediately and then moved 3-2 ahead when Williams double-faulted on game point.
The momentum remained with the Russian and despite squandering three match points, she clinched it on a fourth when Williams sent a tame backhand wide.
"It's an amazing feeling," Makarova said. "It's the first time I have reached a quarter-final.
"It was really tough to play against her and I am really happy I finished it off."
Makarova will meet Maria Sharapova in the last eight, after her compatriot saw off the challenge of Sabine Lisicki to book her place in the quarters.