Despite the loss in the 29th career meeting between the two sisters, Serena, who is still shaking off the rust after a long layoff, leads their career series 17-12.
Serena Williams' return to the WTA Tour came to an abrupt end on Monday as she crashed out of Indian Wells with a 6-3, 6-4 loss to her sister Venus.
Venus closed out the 29th career meeting between the two on her second match point as Serena sailed a forehand long to end the third-round showdown.
It was the first meeting between the sisters since they clashed in the final of the 2017 Australian Open, which Serena won before taking a 15-month hiatus due to her pregnancy.
Serena said she is still easing her way back into match fitness.
"It wasn't very easy, obviously," she said. "It was good to play and try to get in the rhythm and get into the swing again,"
"I can't really replicate the situation no matter how much I do in practice. I make those shots 10 times out of 10 in practice,"
"It's just the nerves, the anticipation you feel naturally. It's a little bit of everything that comes in a match that just doesn't normally happen."
The 10th seeded Venus moves on to the round of 16 where she will face Anastasija Sevastova, who defeated 12th seeded Julia Georges 6-3, 6-3.
It is rare for the Williams sisters to play this early in a tournament and the earliest they have faced each other since their first encounter at the Australian Open in 1998.
They arrived outside the stadium together on a golf cart then walked through the tunnel with Serena entering the court first, as many in the crowd stood and cheered.
Venus blasted six aces but had eight double faults in the one-hour 26-minute main stadium match in front of a crowd of about 13,000.
Serena is still shaking off the rust after the long layoff as she hit four aces but had her serve broken four times.
"I just have a long way to go," Serena said.
Despite the loss Serena still leads their career series 17-12.
This was their first encounter with Venus as an aunt and Serena as a new mother after giving birth to her baby daughter, Alexis Olympia, on September 1.
Venus's victory also comes 17 years after an ugly booing incident led to a 14-year boycott of the tournament by the sisters.
It brought closure to the once testy relationship between Indian Wells and the sisters who hail from the Los Angeles suburb of Compton. Serena returned to the tournament in 2015 and Venus a year later.
Asked about the incident finally being put to rest, Venus said, "It never crossed my mind."
Serena said she is trying not to look too far into the season.
"I have a lot to improve on," she said.
Elsewhere, Australian Open champ Caroline Wozniacki benefited from a challenge call in the final game en route to defeating Aliaksandra Sasnovich 6-4, 2-6, 6-3.
First major title
Wozniacki silenced the critics earlier this year when she claimed her first Grand Slam title at the Australian Open, becoming the first Danish woman to win a major.
The 27-year-old world No 2 Wozniacki moves on to the fourth round, where she will face 20th seeded Russian Daria Kasatkina, who surprised reigning US Open champion Sloane Stephens 6-4, 6-3.
"I managed to get my feet going more, and to start playing more steady, and that paid off today," said Wozniacki.
Wozniacki challenged a call in the final game when the line judge ruled that Sasnovich's shot caught the line. Wozniacki asked for a second look, and the review showed that the line judge mistakenly called the ball in.
Wozniacki said the court conditions were difficult but she managed to make adjustments.
"These courts are really difficult to play on. That's also why you see a lot of upsets," she said. "The ball bounces really high, and it goes extremely slow."
In other women's third-round matches on Monday, French seventh-seed Caroline Garcia defeated Australia's Daria Gavrilova 7-5, 6-4.
Danielle Collins also won her third round match, defeating Sofya Zhuk of Russia 6-4, 6-4.