The Dunedin rider, who won the world title last year, could not kick on in the final kilometre of both her qualifying ride and the rideoff for a bronze medal when she was pipped by Lithuania's Vilija Sereikaite.
Shanks posted a time of three minutes 31.259 seconds to finish third in qualifying then recorded 3min 32.733sec against Sereikaite.
Her training had pointed to a sub 3min 30sec ride and Shanks was shattered she could not deliver.
"She came here to win another rainbow jersey and felt her training was right on schedule to give that a good shot," women's coach Dayle Cheatley said.
"She is bitterly disappointed and right now is shattered.
"Although it is a big disappointment for what she came here to achieve, she has already steeled herself to refocus for the women's team pursuit tomorrow, which is the big goal now and she has a vital role to play there."
American Sarah Hammer, who topped the qualifying times with a super slick 3min 27.826sec, won the gold medal rideoff over Great Britain's Wendy Houvenaghel.
Shanks seemed to be on schedule for a sub-3min 30sec ride in the qualifying round after unleashing a 1min 07.976sec second kilometre following a conservative opening kilo but eased in the final 1000m.
She was then 1.8sec behind after the opening 1000m in the rideoff and although she came home strongly, Shanks just missed pipping Sereikaite.
Shanks' teammate Jaime Nielsen, of Hamilton, produced a creditable 3min 37.212sec to finish seventh fastest in her first ride at a world championships.
The emerging young trio of Adam Stewart, of Christchurch, Auckland's Sam Webster and Invercargill's Eddie Dawkins were a highly meritorious fifth in their debut in the men's team sprint.
They produced a strong ride to clock 44.450sec for the three laps, the fastest by a New Zealand team and good enough to beat home the sprint superpowers of Russia, Australia and Netherlands.
Their time was 2/10ths of a second faster than their New Zealand record set in Invercargill last month, and only 6/10ths off Olympic champions Great Britain, who missed out on the gold medal ride as the third fastest behind France and Germany.
It is the first time a New Zealand sprint trio has competed at a world championships and with Stewart aged 23, triple junior world champion Webster 19 and Dawkins 20, there is real promise for the future.
They also emerged as medal contenders for October's Commonwealth Games, with the second fastest time among Commonwealth behind Great Britain, who will break down to their home countries for the New Delhi competition.
"That was pretty hard for sure but we are so rapt," Dawkins said.
"We knew we were going well but didn't know we could go that fast. This all boils down to the development work the sprint squad has been doing.
"We worked hard individually and BikeNZ said if we got results they would help to fund us. We did that and only came together a few months ago and really started to work well.
"Most of the other team sprint squads have been together for four or five years and we have only been doing this for five or six months. That's really exciting for us, for BikeNZ and for the Commonwealth Games going forward."
Southland 20-year-old Tom Scully had a learning experience when he did not finish in the final of the gruelling 40km points race.
Scully scored points in four of the early sprints but pushed too hard, too early and hit the red line midway through the race.
Australian Cameron Meyer produced a superb display to lap the field twice, once on his own, to dominate the race.
Scully will get another chance in the scratch race tomorrow.
Other New Zealanders in action will be Jesse Sergent in the men's individual pursuit, Simon Van Velthooven and Webster in the keirin and the women's team pursuit.
Leading results:-
Women's 3000m individual pursuit, qualifying: Sarah Hammer (US) 3min 27.826sec 1, Wendy Houvenaghel (Great Britain) 3:30.377 2, ALISON SHANKS (NZ) 3:31.259 3, Vilija Sereikaite (Lithuania) 3:31.905 4. Also: JAIME NIELSEN NZ) 3:37.212 7.
Gold medal ride: Hammer 3:28.601 1, Houvenaghel 3:32.496 2.
Bronze medal ride: Sereikaite 3:32.085 1, SHANKS 3:32.733, 2.
Men's 40km points race: Cameron Meyer (Australia) 70 points 1, Peter Schep (Netherlands) 33 2, Milan Kadlec (Czech Republic) 27 3. Also: TOM SCULLY (NZ) dnf.
Men's team sprint: France 43.373sec 1, Germany 43.458 2, Great Britain 43.802 3, China 44.017 4, NEW ZEALAND (ADAM STEWART, SAM WEBSTER, EDDIE DAWKINS) 44.450 5.
