Williams, playing her 1000th career match, crashes out of Italian Open
The 39-year-old eighth seed fell 7-6 (8/6), 7-5 in under just two hours to the 44th-ranked Argentine, a surprise semi-finalist at last year's Roland Garros.
Williams, a four-time Rome winner and 23-time Grand Slam champion, had not played since her semi-final defeat in the Australian Open this year.
The early exit is a blow three weeks before the French Open in Paris on May 30 where the American continues her bid to equal Australia's Margaret Court's record of 24 Grand Slam trophies.
Despite a battling performance Williams could not wear down the 24-year-old Argentine who broke the American twice in the first set.
Podoroska forced a tie-break with an ace and squandered three set points before sealing the set.
But she will not get to celebrate with the Rome public, with spectators only allowed from Thursday's third round at the Foro Italico while limited to a 25 percent capacity.
Podoroska next meets Croatia's Petra Martic, who earlier beat France's Kristina Mladenovic 7-5, 6-3.