No. 19-seeded Ekaterina Makarova won, 7-5, 6-4, at Rod Laver Arena, taking out the highest-seeded player to fall so far at this year's first Grand Slam tournament.
Makarova beat Williams in the fourth round in 2012 at Melbourne Park and went on to reach the quarterfinals, which remains the Russian's best result at a Grand Slam event. Kerber and Makarova were two of only four women in 2012 to beat Williams, who lost only one match in the second half of last season as she collected titles at Wimbledon, the London Olympics, the U.S. Open and the WTA Championships.
"Seems like it was the same this year and last year. Unbelievable feeling," Makarova said. "I really like to play here. The crowd is so perfect."
Kerber, a Wimbledon semifinalist last year, had defeated Makarova in their previous three matches. On Sunday, the German woman had trouble with her back but said it didn't affect the outcome.
"I think if she played very well she can, yeah, beat also top players," Kerber said.
Makarova will next play the winner of the Sunday's match between Maria Sharapova of Russia and Kirsten Flipkens of Belgium.
In men's competition Sunday, No. 4-seeded David Ferrer swept No. 16 Kei Nishikori of Japan, 6-2, 6-1, 6-4, to reach the quarterfinals.
Nishikori had won two of his previous three matches with Ferrer and was a quarterfinalist in Australia last year, but struggled with 65 unforced errors in the 2-hour 10-minute match.
On Saturday night, No. 2 Roger Federer eliminated the last Aussie remaining with a 6-4, 7-6 (5), 6-1 victory over 20-year-old Bernard Tomic in a third-round match.
Federer took the first point of his match with a forehand winner — the first of three in that game — and Tomic won only two points before the Swiss star converted a service break in the first game.
"I elected to serve, considering I was serving really well the last few weeks," said Tomic, who had held serve for 76 games leading up to his match against Federer. "Yeah … that first service game was important. I lost it. Then I was like, 'Oh, no!"'
Federer has won four of his 17 Grand Slam tournament titles in Australia, but after his victory he told the crowd, "It's not my favorite part of the job beating up on the hometown heroes ... But it's nice that you guys sort of invite me back every year."
Federer will next face Canada's Milos Raonic, who beat Germany's Philipp Kohlschreiber, 7-6 (4), 6-3, 6-4, in a battle of two big servers.
In other matches Saturday night, No. 10 Caroline Wozniacki of Denmark, beat Lesia Tsurenko, Ukraine, 6-4, 6-3; and No. 29 Sloane Stephens of the U.S. defeated Laura Robson of Britain, 7-5, 6-3.