MELBOURNE (AFP) -- A stunned Roger Federer was dumped from the Australian Open Friday in his worst showing since 2001 as Rafael Nadal and Maria Sharapova bounced back to stay in the title hunt.

In the tournament's biggest upset, the Swiss world number two had no answer to Italian Andreas Seppi, who he had conquered in their past 10 meetings.

"Just a bad day. I wish I could have played better but clearly it was tough losing the first two sets," Federer said after crashing out in the third round 6-4, 7-6 (7/5), 4-6, 7-6 (7/5).

"I had chances to get back into it but let it slip. It's a disappointing loss."

The defeat was the 17-time Grand Slam winner's earliest exit in Melbourne in 14 years and aside from his second round Wimbledon flop in 2013, was the Swiss legend's worst performance at a major in more than a decade.

Federer was chasing his fifth Australian Open crown, but has now not won a Grand Slam title since Wimbledon in 2012.

He started sluggishly and when he was broken to love in the first set, giving Seppi a 5-4 lead, it was clear something was amiss with Federer's game.

"To beat Roger first time, especially in a Grand Slam, best-of-five, is a special moment for me," said the 46th ranked Seppi, who had only taken one set off him in their previous 10 matches.

In contrast, Nadal was back to his best against Israel's Dudi Sela, comfortably winning 6-1, 6-0, 7-5 after being pushed to the brink in a five-set epic in the second round when he suffered dizzy spells and cramps.

"The other night was one of the toughest times I have spent on the court and my body wasn't very well and I felt very lucky to get through," he said.

"In general I think I was playing better than I did the other day, I was feeling better tonight."

Sharapova was also on fire, blitzing past Zarina Diyaz of Kazakhstan 6-1, 6-1 to erase memories of her big scare in the second round when she had to save two match points.

"I started really focused, I knew I had a tough, long match previously, so I wanted to start off strong and finish strong," said the Russian second seed.

Murray was also in form, easily beating Portugal's Joao Sousa 6-1, 6-1, 7-5 and is yet to be seriously tested at Melbourne Park.

He will next meet Bulgarian 10th seed Grigor Dimitrov, who struggled against 2006 Open runner-up Marcos Baghdatis with the fired-up Cypriot pushing him to five gruelling sets.

Murray has now reached the round of 16 for the seventh consecutive year as he bids to track down an elusive Australian title after losing to Federer in the 2010 final and Novak Djokovic in 2011 and 2013.

"Grigor has improved a lot over the last couple of years and it should be a fun match," said the Scot.

Dimitrov, Sharapova's boyfriend, looked headed for defeat when Baghdatis won the third set before rallying to claim an exhausting 4-6, 6-3, 3-6, 6-3, 6-3 victory.

Rising star Bouchard also progressed, but made heavy work of downing France's Caroline Garcia, taking 56 minutes to get through the first set before moving up a gear to win 7-5, 6-0.

"I don't think it was the prettiest tennis out there today," admitted the seventh seeded Canadian, who has a big fan base in Australia.

Bouchard is seen as one of the new generation tipped to take the reins from the old guard of Serena Williams and Sharapova, with Dimitrov regarded as a contender in the men's game.

Third seed Simona Halep limped through against American world number 258 Bethanie Mattek-Sands 6-4, 7-5 and will next meet Belgium's Yanina Wickmayer.

Czech seventh seed Tomas Berdych was a more convincing winner, powering past Serb Viktor Troicki while women's 10th seed Ekaterina Makarova also went through.