The 20-year-old Slovakian Cepelova shocked defending champion Williams 6-4, 6-4 in a second-round match at the clay court tournament in Charleston.
The 17-time Grand Slam winner Williams complained about being mentally fatigued after the 84 minute contest.
"I am really just dead," said the 32-year-old American. "I need some weeks off where I don't think about tennis and can kind of regroup. I've had a long couple of years."
Williams, who won this event in 2013, 2012 and 2008, also had her 15-match tour win streak snapped.
Williams was fresh off winning her sixth Miami title and 59th singles crown after beating world No. 2 Li Na, of China, on the weekend.
"I actually made the turnaround really good," Williams said. "Obviously things didn't go great out there."
Unseeded Cepelova, who appears to be headed for a breakout year, was facing Williams for the first time. Cepelova won 55 percent of her first serves and 71 of 136 total points.
She advances to face Elena Vesnina of Russia, who beat another Slovakian, Anna Schmiedlova, 6-2, 6-1.
Williams, 32, blasted four aces but committed three double faults. She won just 12 of 28 points on her second serve.
"I really knew nothing about her game going into the match," Williams said. "She was a great counterpuncher. She played the best she can play."
Williams said she now wants some time off.
"I am going to go on a vacation for sure," she said. "I just need to take a deep breath and regroup. I think it will help me for the rest of the clay court season coming up."
Ousting the world number one came as a surprise even for Cepelova, who had never even beaten a top 15 player before.
Her previous biggest win was against former Charleston champ Samantha Stosur earlier this year in Doha. Stosur, of Australia, was ranked 16th in the world.
Her best tournament result was making the quarter-finals in Shenzhen, China earlier this year.
Cepelova, who will turn 21 next month, beat American wildcard Melanie Oudin 7-6 (7/2), 6-2 in the first round in Charleston.
The other upset of day two of the event saw Teliana Pereira outlast eighth seeded Sorana Cirstea 3-6, 6-3, 7-6 (7/0).
Serena's sister Venus was also a winner on Tuesday.
The 11th-seeded Venus held off Czech Barbora Zahlavova Strycova 6-3, 0-6, 7-5 in two hours, 18 minutes. Venus hasn't won this event in a decade.
Seventh-seeded Stosur, the 2010 Charleston champ, got past Kazakhstan's Yaroslava Shvedova 6-3, 5-7, 6-1 in second-round play.