O'Connell had been locked in a dogged clay-court battle with Roberto Carballes Baena, having taken 80 minutes to wrap up the first set on a tiebreak, but he struggled in the second and pulled out when 6-7 (7-9) 5-0 down.
It concluded a wretched Thursday after Alexei Popyrin and Rinky Hijikata had both been knocked out of the men's event while the lone Australian women's entrant, Daria Saville, had also been defeated in straight sets.
For a while, O'Connell looked as if he would buck the trend in the late game on court four as he attempted to set up an all-Sydney second-round date against Australia's No.1 Alex de Minaur on Saturday.
Up against the tough Spanish clay-court specialist Roberto Caballes Baena, O'Connell was pumped up when he took the first stanza after saving a set point in the tiebreak.
But the problems evidently started to set in soon afterwards, although it still felt somewhat of a surprise when he eventually had to retire after two hours. Whether the withdrawal was precautionary with the French Open at Roland Garros just over two weeks away remains unclear.
Earlier, Popyrin's lean trot continued, with a fourth successive loss on the clay-court swing, well beaten 6-3 6-2 against rising Serbian Hamad Medjedovic, who lifted the Next Gen ATP Finals title last year in Jeddah.
The world No.42 Popyrin hasn't won a set over the last month since his impressive run to the last-16 at the Monte Carlo Masters when he defeated Russian top-tenner Andrey Rublev.
The 21-year-old Medjedovic, the world No.121 who's expected to break into the top-100 soon, cracked 21 winners past the Australian while winning 88 per cent (21/24) of his first-serve points.
Like O'Connell, Hijikata also found a Spanish clay-courter, Jaume Munar, too tough an obstacle as he went down to a 6-4 7-5 defeat, a loss which featured 31 unforced errors from the Australian world No.79.
In the women's main draw, Saville, ploughing a by now familiar lonely furrow as the only Australian in the 128-player field, was beaten in her opening round 6-2 6-3 by Denmark's Clara Tauson, who had already accounted for Perth's Astra Sharma in the qualifying rounds.
