Losing to Ekaterina Makarova of Russia 1-6, 6-2, 6-3 in the second round ended Azarenka's 18-match winning streak to start the season.
Meanwhile, Rafael Nadal spoiled Benoit Paire's 24th birthday by sweeping past the Frenchman 6-3, 6-4.
Azarenka berated umpire Mariana Alves after picking up a second code violation for smashing her racket in the third set.
"After all you've done, how are you still in the game?" the third-seeded Azarenka shouted at the official while on court.
Azarenka said she felt confused by some refereeing decisions.
"I didn't understand what happened, what I did," she said. "I was very sure that I didn't have a code violation, that's why I broke my racket."
The Belarusian double-faulted five times and made only just over half of her first serves, compared to a 60 per cent first-serve accuracy for Makarova, who earned her first career win over a top-three player.
"I played more against myself, trying to prove to myself certain things, more than I was focusing on my opponent," Azarenka said.
Azarenka, the Australian Open champ who missed Indian Wells and Key Biscayne in March due to an ankle injury, said she still felt rusty but was happy there was still one clay tournament — Rome — before Roland Garros.
"I have been making mistakes," she said. "But that's what comes after not playing for a long time. I still have another tournament before the French Open to compete in."
Nadal landed nearly 80 per cent of his first serves and athletically recovered some seemingly apparent winners in a match which Paire stretched to nearly 90 minutes.
"It was a tough game as he is an awkward opponent because he doesn't allow you to build up a rhythm," Nadal said.
"I had a difficult time with the break point in the second set, I don't know how I saved it ... by miracle, I think."
The fifth-ranked Nadal's hopes of returning to the top four in time for the French Open were boosted by Novak Djokovic's surprise loss to Grigor Dimitrov of Bulgaria on Tuesday.
"Novak has had a fantastic year but played against a very young player who has been doing very well, and against whom I, too, was about to lose in Monte Carlo," Nadal said. "With this level of tennis you can depart at any time in a tournament."
Fourth-seeded David Ferrer eased past Denis Istomin of Russia 7-5, 6-2 and faces Tommy Haas in the last 16.
"With Tommy Haas it's going to be a very tough match," Ferrer said. "We played in Miami and went to three sets. Tomorrow I will have to return very well because he is a player that serves pretty good."
Also, Jo-Wilfried Tsonga of France, seeded seventh, beat Robin Haase of the Netherlands 7-6 (5), 7-6 (2), sixth-seeded Tomas Berdych of the Czech Republic beat Jerzy Janowicz of Poland 6-7 (3) 6-3, 6-2, and Kei Nishikori of Japan downed Viktor Troicki of Serbia 7-5, 6-2.