The American tumbled out of the grass-court grand slam in the third round for the first time since 2005 on Saturday, as Frenchwoman Cornet mounted a stirring comeback.
World number one Williams had looked to be in complete control after winning the first set 6-1, but her momentum stalled when it mattered most as Cornet roared back to complete a 1-6 6-3 6-4 victory.
Defeat for Williams continues a below-par 2014 by her own high standards at the grand slams, having also exited the Australian Open and at Roland Garros in the fourth and second rounds respectively.
The top seed came into the contest having only dropped five games in the tournament, and - after a false start that saw the pair forced off at 1-1 for four hours due to rain - she blasted through the first set on the resumption to establish an advantage.
But Cornet had plenty still in reserve.
It helped that Williams' form deserted her - a string of unforced errors allowed Cornet to open up a 5-0 lead in the second - but that should not take anything away from the Frenchwoman.
Williams made 11 errors in the second, 29 in the match overall, and from there the momentum was against her.
Both players appeared nervous in the deciding set, but, surprisingly, it was the normally unflappable Williams who failed to handle the pressure as world number 24 Cornet capitalised on a double break to claim the match.
While one of the favourites exited, another prospered, as Maria Sharapova extended her unbeaten run to 10 matches with a straight-sets victory over Alison Riske.
The Russian, seeded fifth for the tournament, has not lost since May 15 in Rome - winning the French Open on the way - and she extended her fine form with a 6-3 6-0 thrashing on Centre Court.
Sharapova suffered a surprise break of serve in the opening game of the match, but it was plain sailing after that as she won 11 consecutive games to take her place in the fourth round.
Riske's strong start saw her lead 3-1. However, the world number 44 was quickly overpowered by Sharapova, who has still not dropped a set in her three matches at Wimbledon this year and has only lost seven games en route.
While other players in her half of the draw were delayed due to rain on the outside courts, Sharapova will now have chance to rest before facing Angelique Kerber, who was a 3-6 6-3 6-2 winner against last year's beaten semi-finalist Kirsten Flipkens of Belgium.
Third seed Simona Halep has been tipped by many to go all the way this year, and her challenge also remained on course as she dispatched of Belinda Bencic 6-4 6-1.
The Swiss put up a fight in the first set to push her in-form opponent to a 10th game but, having lost the opener, her challenge wilted in the second as Halep completed a straightforward win.
The Romanian will now face debutant Zarina Diyas of Kazakhstan, who was pushed all the way by Russian Vera Zvonareva before winning 7-6 (7-1) 3-6 6-3.
With the weather limiting the rest of the action on the outside courts, Eugenie Bouchard was one of the few to advance unaffected - the highly-rated Canadian 20-year-old booking her place in round four with a 6-3 6-4 triumph over Andrea Petkovic of Germany, while Ana Ivanovic and Sabine Lisicki were locked at 6-4 1-1 in favour of last year's runner-up before bad light ended play.
With Sunday scheduled as a rest day, American Madison Keys and Yaroslava Shvedova will also return to complete their match on Monday with the Kazakh 7-6 (9-7) 6-6 up.