The Kenyan, who also set a world record to win gold in London, lost out to Ethiopia's Mohammed Aman on a cool, wet evening in Zurich.
Rudisha, assisted by a pacemaker, sped away on the first lap but clearly went too early as the pack caught up with him around 200 metres from the end and Aman passed him on the bend to win in one minute 42.53 seconds.
"My legs felt tired and I cannot run good if the weather is not good," Rudisha told reporters. "I hoped for a fast race here and I'm a little disappointed."
American Tyson Gay was disqualified for a false start as Jamaican Yohan Blake won the 100 metres in 9.76 seconds and Olympic champion Shelly-Ann Fraser-Price easily took the women's 100 metres.
The Jamaican beat Carmelita Jeter into second place after losing out to the American twice since the Olympics in Lausanne and Birmingham.
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