Li, the Chinese world number two who was the top seed in the elite WTA premier event, had pounded winners past Pennetta in a crushing 6-2, 6-2 victory in the Australian Open quarter-finals in January.
But her bid to reach the final in the California desert for the first time was hampered by a welter of forehand errors and nine double faults.
"I don't think I was playing bad," Li said. "I think it was pretty high level match. Some points I was feeling I still have chance (but) more important point I got double fault."
Li put the double faults down to a change in the mechanics of her serve, and said it was something she would just have to fight through.
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"Of course if I want to change something, you cannot change for one or two days," she said. "You need time to organize everything.
"I was feeling better and better. Should be OK in next tournament or tournament after," she added.
Pennetta, ranked 21st in the world and seeded 20th here, had never made it past the fourth round in 11 prior appearances.