The top seed lost 6-2, 6-2 in the second round to the world number 35 with her defeat coming just an hour after sister Venus also went out, 2-6, 6-3, 6-4 to Slovak teenager Anna Schmiedlova.
It was the earliest exit for a defending champion at Roland Garros since 2005 when Anastasia Myskina of Russia went out in the first round.
With Li Na losing in the first round on Tuesday, Serena's defeat marks the first time in the Open Era that the top two seeds had failed to get to the third round at a major.
The last time that happened was on her debut at the 1998 Australian Open.
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"Nothing worked today," said 17-time major winner Serena who hit just eight winners and a huge 29 unforced errors with five double faults.
"I just couldn't serve. But you can't be on form every day. I hate to be off at a Grand Slam but it happens, it's not the end of the world.
The 20-year-old Muguruza was over-joyed by her performance.
"Today's a great day," she said. "I really didn't expect that but I'm really happy. I had to be aggressive and I did it well."
Serena's defeat was good news for Maria Sharapova who is now the overwhelming title favourite.
The Williams sisters had been scheduled to meet in the third round but their back-to-back exits represented just the fourth time they had lost on the same day at a major.
Schmiedlova was just a month old when the American made her professional debut back in 1994.