Twelve months ago 21-year-old Watson became the first British woman to win a singles title on the WTA Tour for 24 years.
That helped her finish the year in the top 50 and she reached a career-high ranking of 39 in February.
But Monday's result will see her drop out of the top 100 when the rankings are updated next week.
It was certainly not an easy draw against seventh seed Puig, one of the rising stars of the women's game, and Watson had her serve broken five times in a 6-4 6-4 defeat.
Watson's slide began when she missed two months of the season in the spring after being diagnosed with glandular fever.
She returned for the French Open but has won only five matches since and admitted at the US Open that she came back too soon.
Watson changed coaches after losing in the first round of Wimbledon, splitting from Mauricio Hadad and linking up with Jeremy Bates, but the partnership has yet to bear fruit.