Murray's defence of his AEGON Championships crown at Queen's ended in limp fashion as he lost 3-6 7-6 (7/4) 6-7 (1/7) to world number 65 Nicolas Mahut on centre court.
Murray seemed off colour in the first set and despite a marginally improved showing thereafter, Mahut fully deserved to advance to the last 16 after outclassing his opponent in almost every department.
Having exited the French Open at the quarter-final stage earlier this month, Murray had been looking to use Queen's as a platform from which he could launch an assault on the Wimbledon crown he craves so dearly.
The defeat will raise further questions about his ability to go all the way at the All England Club next month, especially now that he will have little practice on grass, but the Scot is not concerned.
"It's panic stations now. I've just got no chance to be ready for Wimbledon. It's going to be impossible, I think," the world number four said sarcastically.
"This kind if thing happens often. Novak Djokovic isn't playing the next two weeks so there is no need for me to panic.
"I lost the match 7-6 in the third in my first game of the tournament and it takes a bit of time to adjust to the grass courts."
Murray now aims to play a couple of exhibition games next week and will resist the temptation to play in the AEGON International at Eastbourne.
There was no sign of a Murray failure at the start of the game as he earned two break points against the unseeded Mahut, but his opponent survived and gained the initiative after a questionable sliced lob left the door open and Mahut moved 4-2 ahead.
Murray edged a nervy second set tie-break but then threw away the match in the following set. He broke Mahut but the 6ft 3in 2007 finalist broke back and showed remarkable composure to swat aside the home favourite in a very one-sided tie-break.
"He's a very good grass court player," Murray said of Mahut.
"He's been in the final here, he's beaten Rafael Nadal here and was a point away from winning the tournament (in 2007).
"He played well today [Wednesday]. I thought I played some decent tennis, and I felt like I was striking the ball well, but I missed some shots in the tie-break in the third."
Mahut is in a rich vein of form at the moment having progressed to the third round of the French Open earlier this month where he put up an impressive fight in a four-set defeat to Roger Federer.
The Frenchman is best known for his 70-68 fifth-set defeat to John Isner at Wimbledon in 2010 but he now hopes English tennis fans will remember him for this victory instead.
"Maybe they will talk about this match for a while and not only about the Isner match," he said.
"I was the guy who lost this match so for once, I'm the one who won the match.
"Beating Rafa here was a very good performance, but today [Wednesday] beating Andy Murray here at Queen's is very special."
Murray, meanwhile, has brushed off Tommy Haas' claim that he fakes on-court injuries.
The 34-year-old told German TV yesterday that Murray goes down "looking like he is injured ... and then (is) moving like a cat" after his trainer tends to him.
Murray said: "I don't care for his opinion. From the time I have been on tour I've been called many, many things from my personality not being exciting enough. I have been called boring. It was said I was unfit, lazy, fake injuries.
"It's something that kind of goes hand in hand with playing sport. People criticise you regularly. You need to just deal with it."