The 2018 winner, back on the circuit with her two young children in tow, exited the tournament in Melbourne 6-1, 4-6, 1-6.
The second-round defeat for Wozniacki, who came out of retirement last year, follows first-round exits for fellow mums Angelique Kerber and Naomi Osaka.
The Danish former world number one, who harboured hopes of winning a second Australian Open crown, said she felt the match "slid out of my hands" after a good start.
"I would like to say that my mind, I can just kind of brush it under the carpet, but it sucks just as much," said the 33-year-old, given a wildcard to compete in Melbourne.
"You know, losing now and losing back then (before her retirement in 2020), it doesn't really change. As a competitor you want to win everything.
"When you have the family here and you bring everyone, you want to win even more because you want to stay longer and not have to move around."
Wozniacki, now ranked 252 in the world, flew out of the blocks under the closed roof of the John Cain Arena, leading by a set and 2-0.
But she could not maintain her momentum against the heavy-hitting Timofeeva, who pummelled 40 winners in an impressive attacking display.
The 20-year-old, part of a crop of exciting young Russians, said it was an honour to face Wozniacki.
"These two weeks already for me so far feels very special since it's my first Australian Open, first main draw of a Grand Slam, and everything feels like a dream so far," she said.
"Of course, Caroline is a very experienced player and I was just very happy to play against her. Just enjoyed there on the court, and it means really so, so much for me."
Timofeeva will play 10th seed Beatriz Haddad Maia in the third round.
