Raonic dropped a 6-3, 7-5 decision to Britain's Andy Murray to fall to 0-2 in round-robin play. The Canadian will face Japan's Kei Nishikori on Thursday in a must-win match.
Raonic could not seem to get his usually strong service game on track in the 91-minute match. The hard-serving right-hander was limited to just four aces and his first-serve percentage barely cleared 50 per cent.
"I didn't do my job today," said Raonic. "To be frank, my first serve percentage at this moment, at least today, shouldn't have been above 40 per cent. I started hitting serves 115 miles an hour to get it past 50 per cent.
"I haven't served well, I've been too passive on the court. I've been trying to beat the two guys playing their tennis and that's not going to work for me."
The Canadian was forced to save two break points in the fourth game, then lost serve on a forehand error as Murray took a 4-2 lead. Raonic later saved two set points before eventually dropping the opener in 37 minutes.
Murray picked up a late break in the second set to move ahead 6-5 and completed the victory when Raonic sent a return long.
Raonic, from Thornhill, cannot lose a set against Nishikori in order to keep his faint semifinal hopes alive.
"I have some slim possibilities," Raonic said. "I have to win in straight sets, but I'm not going to start counting games now."
Earlier, Canadian doubles veteran Daniel Nestor and Serbian partner Nenad Zimonjic also suffered their second loss and hold a slim chance of advancing out of the group stage.
The pair, who are playing their final tournament together after two partnerships over the years, dropped a 6-4, 5-7, 10-4 decision to Frenchmen Julien Benneteau and Edouard Roger-Vasselin.
Despite a 0-2 record, Toronto's Nestor and Zimonjic are not officially out of contention for the semifinals, but they, like Raonic, will need to win their final group match to have any hope of advancing.
"Not so great I would imagine," a despondent Nestor said of his team's chances. "We're trying to win the last match and that's it.
"It would be good to win this last match, you always want to finish a season on a better note. When you don't do so well you are motivated to try and get back into the winner's circle."
The defeat was the second for the pair in four meetings with the French team this season, with Nestor and Zimonjic winning at the Rogers Cup in Toronto and in Sydney.
Nestor and Zimonjic were defeated in just under 90 minutes, with six aces and four double-faults. The team saved 12 of the 14 break points they faced but were able to break the French serve only twice in 10 attempts.
The second-seeded duo went down in the 29-minute opening set after Nestor was broken in the seventh game.
But in the second, the veteran pair fought back as Zimonjic saved three break points to hold for 5-all. A break of Roger-Vasselin in the final game sent the match to a tiebreak set.
Nestor and Zimonjic trailed 2-4 and faced five match points at 4-9, with Nestor pounding a service return forehand into the net to lose.
"They were better and returned much better in key moments," Nestor said. "They came up with big shots and put a lot of balls at our feet."
Nestor and Zimonjic won the title in London in 2008 and 2009. Nestor, who is making a record 15th appearance at the season-ending event, also claimed the trophy in 2007 with Mark Knowles of the Bahamas and 2011 with Max Mirnyi of Belarus.