The 2004 Olympic champion and former world record holder hit the first hurdle with his lead leg and tumbled to the ground before being helped from the track with his dream of regaining the title in tatters.
Liu's American rival Aries Merritt described it as a "tragedy".
"It was just terrible. That it happens to one of the best hurdlers of all time is just a tragedy," Merritt told reporters.
"In the hurdles, if you hit a hurdle in the competition to recover is almost impossible. It is just a shame it had to happen to Liu because I was looking forward to competing against him."
China's first male gold medallist on the Olympic track, Liu remains one of his country's most popular sportsmen alongside former basketball player Yao Ming.
The 29-year-old is still plagued by the Achilles injury that forced him to pull out at the Bird's Nest in Beijing but he had hit a rich vein of form this year.
A blistering run of 12.97 seconds in his hometown of Shanghai was his first run under 13 seconds in five years and he backed that up with a 12.87 run in Oregon, which would have tied the Dayron Robles's world record but for an illegal wind.
The first indication that the injury demons might have returned came when he pulled out of last month's London Grand Prix, "a precaution" his camp said.
On a cool morning in London, China's vast media corps had streamed into the Olympic Stadium and waited expectantly for the sixth and final heat.
"He had a good warm up and was happy," Merritt added. "I don't think anything was wrong with him.
"I just think he made a small little mistake and ran up on the hurdle a little too quickly and wasn't prepared to take the hurdle at such a velocity."
A supreme technician in the high hurdles, Liu barely even brushes the barriers during a race so it is likely that injury, nerves or a combination of both contributed to such a major error.
"We know Liu Xiang has been suffering with his Achilles," said British former hurdle Colin Jackson, whose world record Liu equalled in his gold medal run in Athens eight years ago.
"He had to push hard and when you have to reach for the first barrier and you've got a stress injury like an Achilles it can cause you hell and he couldn't even take off."
Liu's biggest rival, Cuba's defending champion Robles, had earlier looked comfortable as he eased into the semi-finals in 13.33 seconds despite missing most of this season through injury.
Merritt, the form hurdler this year with three runs of 12.93 seconds, stormed through to win his heat in 13.07 seconds, the fastest first-round time at an Olympics.
His compatriot and world champion Jason Richardson, who has also run under 13 seconds this year, won his heat in 13.33.
Britain's Andy Turner came through the chaos caused by Liu's fall to win the heat in 13.42 seconds and then helped the limping Chinese off the track.
"The guy is probably the best hurdler in history," Turner said. "I have so much respect for him. It was horrible seeing him limp off like that so you got to go and help him.
"He is a nice guy and I would not wish that on my worst enemy."
