The American Fritz, who had a breakthrough 2022 with titles at Indian Wells, Tokyo and Eastbourne, fell in five gruelling sets at a partisan John Cain Arena.
Australia's Popyrin prevailed 6-7 (4-7), 7-6 (7-2), 6-4, 6-7 (6-8), 6-2.
The opening Grand Slam of the year has now lost three of its top 10 seeds before the third round, with Rafael Nadal and Casper Ruud also crashing out early.
"This is a dream and I don't want to wake up at all," said Popyrin, who equalled his best Grand Slam result and was reduced to tears by the crowd chanting his name.
"Pre-season I put my head down and worked as hard as I possibly could... I'm going to keep working. I love this feeling and I want more of this feeling."
Fritz, who helped spearhead the US to the United Cup title leading into the Australian Open, had never before lost at Melbourne Park to a player ranked as low as number 113 Popyrin.
