Osaka has been carrying a knee injury and called the trainer and a medic on midway through the second set, although she was able to carry on without receiving any treatment.
However, the 21-year-old from Japan was beaten 7-5 6-4 by the Swiss 13th seed.
Osaka said: “I hurt my knee in Cincinnati, but it’s getting better. I don’t want to say that that’s the reason that I lost, because I obviously had played three matches before this.
“Right now I have this feeling of sadness, but I also feel like I have learned so much during this tournament. Honestly, of course I wanted to defend this tournament.
“I feel like the steps that I have taken as a person have been much greater than, like, I would imagine at this point.
“So I hope that I can keep growing. I know that if I keep working hard, then of course I’ll have better results.”
Her defeat came just a day after men’s champion Novak Djokovic also bowed out after retiring at two sets down to Stan Wawrinka.
Osaka was cheered to the rafters as she trudged off court, a crowd favourite now after the way she consoled American youngster Coco Gauff following their match on Saturday night.
It was a third straight win for Bencic over Osaka this year, and she said: “The challenge cannot be bigger against Naomi, she won this title last year.
“I’m really pleased with my game and how I handled my nerves.
“I tried taking the serve early and trying to anticipate, because she has a lot of power. I don’t hit so many winners. I try to play it a little bit like chess.
“I was in the stadium watching the (Gauff) match and thought it was an unbelievable moment for tennis. What Naomi did is what a true champion would do.”
Bencic will play Donna Vekic in the quarter-final after the Croatian came from a set down to beat Julia Goerges of Germany.
Goerges had a match point in the second set but ended up losing 6-7 (5) 7-5 6-3.
The runs of American wild card Kristie Ahn and qualifier Taylor Townsend came to an end late on Monday night.
New Yorker Ahn was beaten 6-1 6-1 by Elise Mertens while Chicago’s Townsend lost to 15th seed Bianca Andreescu of Canada 6-1 4-6 6-2.