The Frenchman recently announced that he will hang up his racket at the end of the current season, and today, at the start of the tournament in the "Magic Box", he was defeated by Argentine Camilo Hugo Carabelli in two sets - 6:3, 6:4.
Karabeli, ranked 57th in the world, needed just one break in both sets.
Monfils has played in Madrid 15 times, with his best results coming in 2008 and 2010 when he reached the quarterfinals.
Carabelli's next opponent will be 10th seed Italian Flavio Cobolli.
Kasper Rudd is defending the title in Madrid, and the first favorite is Janik Siner.