Capriati, playing her first match of the year after receiving a first-round bye, has no more competitive tennis before she begins her Australian Open defence next week.
"I've just got to forget about it and think about next week," the top-seed ed American said.
"It is the start of the year, my first match back so it's to be expected that I'm not going to play the greatest."
In the men's event, French Open winner Albert Costa and defending Sydney champion Roger Federer also suffered unexpected defeats.
Costa was bundled out by last year's Sydney runner-up, Argentine Juan Ignacio Chela 7-6 6-1, while world number six Federer lost to qualifier Franco Squillari 6-2 6-3.
Federer was hampered by a leg problem which he said would require immediate treatment but would not stop him playing the first grand slam of the year.
"So long as I can walk and play a little bit, I'll go on court," he said. "I'm not considering pulling out."
Last year's Australian Open runner-up Marat Safin was untroubled in brushing aside Olivier Rochus 6-1 6-4 while former world number one Carlos Moya had to dig deep before seeing off a determined James Blake 6-3 6-7 6-3.
Blake, fresh from his victory over current world number one Lleyton Hewitt in the final of the Hopman Cup, saved three match points in the tiebreak to force the match into a third set, but could not raise his game again as Moya seized control. American third seed Andy Roddick crushed Tommy Robredo 6-2 6-2 while Thailand's Paradorn Srichaphan knocked out the last remaining Australian Scott Draper 6-4 3-6 6-1, 24 hours after arriving in Sydney following his victory at the Indian Open.
Paradorn beat the top seed Sebastien Grosjean in last year's Sydney International when he was given a special wildcard reserved for Asian players but did not need an exemption this year.
Ranked 14th in the world, Paradorn is seeded eighth and among the favourites to win the title. Capriati also lost her first match in Sydney last year before going on to win her second Australian Open title in an epic final with Martina Hingis.
The world number three struggled to find her rhythm against Panova on Tuesday as the wind swirled around the Sydney Olympic tennis centre courts making serving difficult.
There were 15 breaks of serve and 124 unforced errors in the match but Capriati said she was confident she would get her game back in time for the Australian Open.