Top seed Williams, the overwhelming favourite for the title with her chief rivals already out, appeared to have turned the match around when she led 3-0 in the decider but Lisicki, the 2011 semi-finalist, rallied with a gripping fightback on Centre Court.
Lisicki refused to capitulate and after breaking to lead 5-4, the resilient 23rd seed secured victory on her second match point to set up a last-eight meeting with Estonian Kaia Kanepi.
"Serena played a fantastic match, she is such a tough opponent. It is an amazing feeling to win this match. This is such a special place for me and the crowd were brilliant to me.
"I gave it everything I had, I fought for every single point to try to win it somehow. I'm not thinking about the next match yet."
After dropping just 11 games in the first week, her surprise exit, which mirrored those of former men's champions Roger Federer and Rafa Nadal last week, ended Williams's win streak at 34 matches and it was only her fourth loss in the last 76.
Lisicki took advantage of a somewhat sluggish Williams to seize the first set, her strong serve and fizzing groundstokes at times leaving the multiple grand slam winner rooted to the spot.
The American, aghast, annoyed and berating herself after each error, desperately searched for the missing aggression and from 1-0 down in the second, reeled off nine games in a row.
She made no unforced errors to breeze through the second set and appeared to have knocked the stuffing out of her reeling opponent.
But the doubts began to creep back into her game as each time she appeared to be in control, the German answered with breaks of her own before Williams dropped her serve to trail 5-4.
Williams saved one match point, then wasted a break point of her own before Lisicki sealed the biggest victory of her career with a rasping forehand winner.