The fifth-seeded Zheng was distracted by a time penalty and ultimately overpowered by the world No.97 from Germany, who acknowledged she played "more than my best tennis".
In addition to her breakout run to last year's Open title match, the Chinese star  made five more finals, won gold at the Paris Olympics and was runner-up to Coco Gauff at the showpiece season-ending championship.
But she was no match on Wednesday for the 36-year-old Siegemund - the oldest player still in the women's draw - who won 7-6 (7-3) 6-3 in two hours and 16 minutes.
It was the German's first victory over a top-10 player since 2022.
Zheng Qinwen was no match for unheralded Laura Siegemund in the second round at the Open. (AP PHOTO)
"I knew I had to play more than my best tennis," Siegemund said in her on-court interview.
"I had nothing to lose, so I just told myself to swing freely.
"(Zheng) is an amazing player, just one of the best players right now.
"But I know that I can play well and I just wanted to show that to myself and make it a tough fight."
Zheng was disappointed to be hit with a time penalty on her serve by the chair umpire in the second set, claiming she could not see the clock.
"Obviously that one really distracted me from the match," she said.
"This is the first time I have this situation about a time violation and this is my fourth year on tour."
Zheng's conqueror in last year's final at Melbourne Park, world No.1 Aryna Sabalenka, overcome a second-set scare to take another step on the road to becoming the first women this century to win three successive Australian Open crowns.
Unseeded Spaniard Jessica Bouzas Maneiro led 5-2 in the second set, only for the top seed from Belarus to step on the gas.
Sabalenka, 26, reeled off the last five games in succession to win 6-3 7-5.
Aryna Sabalenka reeled off the last five games to power into the third round at Melbourne Park. (James Ross/AAP PHOTOS)
Next up for the Belarusian is a round-of-32 encounter with another unseeded player, Denmark's Clara Tauson, who trounced German Tatjana Maria 6-2 6-2.
Swiss superstar Martina Hingis was the most recent woman to lift the Daphne Akhurst Memorial Cup on three successive occasions from 1997 to 1999.
Two-time Open champion Naomi Osaka recovered from a slow start to beat Czech 20th seed Karolina Muchova 1-6 6-1 6-3.
Muchova is best known in these parts for ousting Ash Barty in the quarter-finals in 2021 and, for a while on Wednesday, it looked like she was going to take down another crowd favourite.
But Osaka - a former world No.1 now ranked just outside the top 50 after taking away from the sport following the birth of her daughter Shai - hit back hard.
Naomi Osaka was a popular winner on day four at Melbourne Park. (James Ross/AAP PHOTOS)
Her opponent in the third round is another new mother who has made a recent return to the tour - Belinda Bencic from Switzerland.
Bencic, who reached a career-high world ranking of No.4 in 2020, downed Dutchwoman Suzan Lamens 6-1 7-6 (7-3).
Seventh-seeded American Jessica Pegula finally beat Elise Mertens for the first time in four attempts, knocking out the Belgian 6-4 6-2.
Mertens' best-ever performance at a major came at her Australian Open debut in 2018 when she made it all the way to the semis before bowing out to Carolina Wozniacki.
Pegula reached her maiden grand slam final at last year's US Open, where she lost to Sabalenka.
Russian teen star Mirra Andreeva, the No.14 seed, edged into the third round with a 6-4 3-6 7-6 (10-8) victory over Japan's Moyuka Uchijima.
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