Wilson, heavily fancied to reach the business end of the tournament with Judd Trump and Ronnie O'Sullivan absent, came through a tough match against Marco Fu in his first match but was dumped out by O'Connor in a final-frame decider.
The world number five is a two-time winner of the tournament, as long ago as 1996 and 1999, but was unable to mount a charge as he succumbed 4-2 to Stephen Maguire.
World champion Kyren Wilson is out of the Welsh Open after a shock 4-3 defeat to Joe O'Connor in the second round in Llandudno.
Maguire got the better of Williams in a workmanlike contest, keeping his own prospects of qualifying for next month's World Grand Prix via a final-four finish.
The door had opened for Wilson to overtake Neil Robertson in the race for the £150,000 BetVictor Series bonus after the latter's exit, but he was unable to capitalise.
