The three-time champion had won his last 19 matches on grass, including last year's triumphs at Queen's Club and Wimbledon, but was left stunned in the third round by a magnificent performance from Stepanek, who progressed 7-6 (12-10) 6-2.
Stepanek recovered from losing serve in the opening game to force a first-set tie-break, a strong first serve helping the veteran win 92 per cent of points on first serve.
Murray appeared on course for victory when leading 6-3 in the shootout, however, the Brit wasted eight set points before Stepanek took his first opportunity to move into the lead.
And the Czech carried that momentum into the second set, breaking Murray immediately and going on to take the match in relatively comfortable fashion.
Defeat for Murray is a major dent in his preparations for defending his title at Wimbledon, with pressure heaped upon him and new coach Amelie Mauresmo.
Stepanek, seeded 15th for the ATP 250 tournament, will now face seventh seed Kevin Anderson in the quarter-finals following the South African's 6-3 3-6 7-6 (7-4).