A surprise runner-up to Andre Agassi here last year, Schuettler let slip a two-set lead before exiting 4-6, 4-6, 7-5, 6-3, 6-4.
Another former finalist left the tournament on day one but Carlos Moya did not even have the chance to hit a ball.
The Spanish former world number one, runner-up in 1997, pulled out of his first round match with James Blake with an ankle injury.
In the women's field, top seed Justine Henin-Hardenne showed no mercy to her 15-year-old opponent, hammering Australia's Olivia Lukaszewicz 6-0, 6-0.
Next up for the Belgian world number one, who won a warm-up tournament in Sydney last week, is French qualifier Camille Pin.
"It's a good start to the year...I played well last week and am just happy with my play right now in the first Grand Slam," Hennin-Hardenne said.
Schuettler, however, was far from happy with his form.
"GREAT MEMORIES"
"I had great memories from last year here, and of course there was a little pressure," Schuettler said. "But that was not the reason I didn't play well.
"He had nothing to lose. I had chances to win but again, I just didn't take them," he told reporters.
Schuettler was joined at the exit by Russian seeds Elena Dementieva and Nadia Petrova.
Seventh seed Dementieva slumped to Jelena Jankovic of Serbia and Montenegro 6-1, 6-4, while 10th seed Petrova lost to Hungarian Aniko Kapros 6-3 6-3.
Dementieva was so disappointed that she said she may skip the Open next year.
"Maybe I should not play the Australian Open next season because I never play well here," said the dejected Russian, who also lost in the first round last year.
"I think it was impossible to be ready to play... after being with my family in Moscow at Christmas. But I wouldn't change my schedule. My life is more important to me than tennis," she said.
MIXED START
Vera Zvonareva and Svetlana Kuznetsova fared better in a mixed start for the Russians.
Eleventh seed Zvonareva pounded Czech Zuzana Ondraskova 6-3, 6-1 and 30th seed Kuznetsova breezed past American Shenay Perry 6-3, 6-3.
While Dementieva was left disappointed by the defeat, it marked Jankovic's best result of her short career.
"It's my first win over a top 10 player...it is my biggest win," she told reporters. "I am just so happy."
Thai Tamarine Tanasugarn, a favourite at the tournament which bills itself as the grand slam of Asia, disappointed her fans, losing to Laura Granville of the United States 6-1, 6-3.
But Thai men's 13th seed Paradorn Srichaphan eased past Argentine Jose Acasuso 7-5, 6-4, 6-0.
American Robby Ginepri handily beat Peru's Luis Horna 7-5, 6-3, 6-3 and Chris Guccione won the all-Australian battle over Alun Jones 6-3, 7-6, 6-2.
