While older sister Venus Williams continued her progress and moved through to the semi-finals with a 6-2 6-7 6-4 win over US Open champion Samantha Stosur, Serena struggled against an impressive Kerber en route to just her fourth defeat of the year.
Top seed Agnieszka Radwanska of Poland, struggling with a sore shoulder, was beaten 6-1 6-1 by ninth-seed Li Na of China.
Serena, who had not lost since her opening round defeat at the French Open, complained of fatigue after her last 16 match on Thursday but she fell on Friday to an opponent who used a mix of intelligence and technique to make her life difficult.
"It was probably for the best that I didn't win today, even though I wanted to win. But maybe my body was like telling me not to. I don't know," said Williams, whose loss came in her 31st match, including singles and doubles action, since the start of Wimbledon.
"I felt really good going out there today, much better than my other two matches but it was a false alarm.
"She didn't do too much that threw me off. Her game is pretty straightforward and you know what to expect. She's getting a lot of balls back. She played really well today and I think she served more up the T than I expected."
Kerber, who has reached at least the quarter-finals in 12 of 17 events played this year, double-faulted on match point but on her third chance used a blistering ace to win the match.
"I had nothing to lose today, I tried to play my best and take it point by point because she has been playing so well recently," Kerber, the world number seven, told reporters.
The German's opponent in Saturday's semi-final will be Czech fourth seed Petra Kvitova, who beat Russian Anastasia Pavlyuchenkova 6-3 7-6.
Venus Williams's recovery from health problems is finally delivering some results after reaching her first semi-final since pulling out of last year's US Open with an auto-immune disease that causes fatigue and joint soreness.
"I'd like to think that this is only the beginning for me of more semi-finals. Of course I'm going to stay focused and try to make it to the final as well," said Williams.
"I'd like to take it a lot further. I haven't played a lot since 2010, so this is awesome for me already."
Up against her in Saturday's semi-final will be Li Na who came through two matches on Friday.
First she took care of her third round match, which was postponed due to rain on Thursday, beating Sweden's Johanna Larsson 6-2 6-2. Then Li beat top seed Radwanska, the runner-up at this year's Wimbledon, who looked well below her best in a one-sided affair.
The Pole said she had been hampered by a sore shoulder although she does not believe it will stop her playing in New Haven next week, the final tour stop before the US Open.
"It's been on and off since last year, to be honest. But here it's almost near the end of the season and I played a lot this year and we have been changing the surface very often and the balls as well, so it's not always easy," she said.
Li should be a tough opponent for Venus, the Chinese player benefiting from a new coach, Carlos Rodriguez, the former long-term aid of multiple Grand Slam winner Justine Henin.