Second-seeded Ruud needed a medical timeout and was always struggling against hard-hitting Jenson Brooksby, the Norwegian going down 6-3, 7-5, 6-7 (4/7), 6-2.
Defending champion Nadal limped out of the tournament on day three in a shock defeat to Mackenzie McDonald and on day four it was another American who ousted Ruud.
The top two seeds are now gone in the first week at Melbourne Park, with Nadal saying on Thursday he will be out for about six to eight weeks with his hip injury.
The 39th-ranked Brooksby, who is on his Australian Open debut, will face Tommy Paul in round three after his fellow American beat Spain's Alejandro Davidovich Fokina in five sets.
"First and foremost, Casper is a warrior, I knew it would be a great battle out there," said Brooksby, 22.
"I'm just really proud of my mental resolve after the third-set battle didn't go my way, and to turn it around."
Serbia's Djokovic will step up his bid for a record-extending 10th Australian Open crown when he faces 191st-ranked French qualifier Enzo Couacaud in the night session on Rod Laver Arena.
The former world number one, attempting to equal Nadal's record 22 major titles, started his campaign with a ruthless victory over Spain's Roberto Carballes Baena.
Also into round three of a men's draw which was already missing injured world number Carlos Alcaraz is Russia's fifth-seeded Andrey Rublev. He beat Emil Ruusuvuori of Finland 6-2, 6-4, 6-7 (2/7), 6-3.
Britain's Dan Evans, seeded 25, saw off Jeremy Chardy 6-4, 6-4, 6-1.
The Frenchman was left fuming and accused the chair umpire of making "the biggest mistake of the Australian Open", demanding: "Are you looking at the birds? The clouds?"
It came at a crucial moment with Chardy defending break point at 3-3 in the opening set.
As he hit a forehand, a ball fell out of his pocket but he kept playing and Evans returned, with the umpire calling "Let" a split-second after Chardy hit his next shot which found the net to lose the point.
The Briton said he didn't see the extra ball so the umpire elected not to replay the point, handing him the break.
Chardy insisted play should have been stopped when the ball fell from his pocket and the point replayed.
- Ominous Sabalenka -
In the women's draw on day four, Aryna Sabalenka showed why she is a serious contender for the title by powering into the third round.
The Belarusian swept past 51st-ranked American Shelby Rogers 6-3, 6-1 in an hour and 27 minutes and faces 26th-seed Elise Mertens.
Sabalenka, who reached the semi-finals at the US Open last year, extended her 2023 unbeaten record to six matches. She won the recent Adelaide International without dropping a set.
It is a marked contrast to the start of last season when her serve completely deserted her, reducing her to tears during an Australian Open warm-up event.
Sabalenka served three aces against Rogers but, tellingly, no double faults. She talked openly about the hard work involved in turning her fortunes around.
"I worked a lot on my serve. You can't even imagine," she told reporters.
"Oh my God, I did, I think, almost everything to trying to fix my serve."
American qualifier Katie Volynets dumped out Russian world number nine Veronika Kudermetova.
The 21-year-old Volynets won 6-4, 2-6, 6-2 on Margaret Court Arena and then paid a heartfelt tribute to her extended family in war-ravaged Ukraine.
"It's really a difficult time. Before, everyone used to be able to move about the country however they want to and go on with their days," said Russian-speaking Volynets.
"And now it's just, you know, day-to-day.
"I really feel for them and to have their support through all of this is incredible."
Other seeds beaten in round two were Anett Kontaveit of Estonia, who lost to Magda Linette of Poland, and Russia's Liudmila Samsonova.
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