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Irishwoman Taylor, bidding to win a sixth consecutive World title, lost a split decision against France's Estelle Mossely in Kazakhstan.
Taylor, 29, was given all four rounds by one judge but the other two judges handed Mossely a countback victory.
The Bray fighter takes bronze but does secure Rio Olympics qualification.
Taylor's domination of the 60kg division was dented last month by a unanimous points defeat by  Azerbaijan's Yana Alekseevna at the Olympic qualifying tournament in Turkey.
The Irish boxer hadn't lost a fight at the world championships since 2005 when she was defeated by North Korea's Kang Kum-Hui in the quarter-finals.
The judging appeared decidedly confusing during Thursday's contest with Taylor given the third round on all three cards despite the Frenchwoman appearing to dominate the round.
Taylor then appeared to edge the final round only for two of the judges to plump for Mossely.
That left Taylor a 40-36 winner on one of the cards while the two judges that marked the contest 38-38 gave Mossely a countback victory.
The Irishwoman had beaten Mossely in their three previous contests.
Irish light-welterweight Kellie Harrington is through to the final of the World Championships after an emphatic semi-final victory over Canada's Sara Cali in Kazakhstan.
The Dublin fighter is guaranteed at least a silver medal ahead of Friday's final against China's Wenlu Yang in the non-Olympic weight.
London 2012 gold medallist Katie Taylor suffered a second defeat in six weeks as she was beaten in the World Championship lightweight semi-finals.