The world number 22 went down 4-3 to Chinese Yu Delu, a player he had beaten in their two previous meetings.
At 3-2 down in the sixth frame Yu missed a difficult frame-ball red and Day completed a 73 clearance to stay in the match.
However the Welshman reverted to form in the decider as Yu took a deserved win.
In other notable matches, six-times World Championship finalist Jimmy White lost 4-2 to Lin Shuai in the first round while in the two all-English clashes Ricky Walden edged a seven-frame contest against Mark King and Robert Milkins defeated Andrew Higginson 4-2.
Wednesday's results
Round two
Stuart Bingham 4-1 Huang Jiahao
Michael Holt 4-1 Wang Linhan
Ma Bing 3-4 Li Yan
Ken Doherty 4-2 Tang Jun
Shi Hanqing 4-2 Lin Yongzhi
Lv Haotian 4-3 Zhang Yadong
Zhang Yong 4-3 Yu Xuanlang
Ben Judge 0-4 Matthew Stevens
Tom Ford 4-3 Cui Ming
Wang Lige 0-4 Hu Hao
Daniel Wells 2-4 Zhu Yinghui
Mark King 3-4 Ricky Walden
Chen Zhe 1-4 Ma Yanpeng
Fang Xiongman 2-4 Zhang Anda
Lu Ning 2-4 Guan Zhen
Ryan Day 3-4 Yu De Lu
Barry Pinches 0-4 Ju Reti
Zhao Xintong 1-4 Zhou Yuelong
Li Hang 4-1 Chen Feilong
Ji Zhijun 2-4 Feng Guowei
Liu Chuang 4-1 Lu Chenwei
Andrew Higginson 2-4 Robert Milkins
Chen Ruifu 4-1 Jin Long
Cai Jianzhong 4-1 Pan Weixing
Cao Yupeng 4-0 Da Hailin
Lin Shuai 3-4 Xu Xinjian
Dominic Dale 1-4 Cao Xin Long
Round one
Jimmy White 2-4 Lin Shuai
