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Irishwoman Taylor, bidding to win a sixth consecutive World title, lost a split decision against France's Estelle Mossely in Kazakhstan.
Taylor, 29, was given all four rounds by one judge but the other two judges handed Mossely a countback victory.
The Bray fighter takes bronze but does secure Rio Olympics qualification.
Taylor's domination of the 60kg division was dented last month by a unanimous points defeat by  Azerbaijan's Yana Alekseevna at the Olympic qualifying tournament in Turkey.
The Irish boxer hadn't lost a fight at the world championships since 2005 when she was defeated by North Korea's Kang Kum-Hui in the quarter-finals.
The judging appeared decidedly confusing during Thursday's contest with Taylor given the third round on all three cards despite the Frenchwoman appearing to dominate the round.
Taylor then appeared to edge the final round only for two of the judges to plump for Mossely.
That left Taylor a 40-36 winner on one of the cards while the two judges that marked the contest 38-38 gave Mossely a countback victory.
The Irishwoman had beaten Mossely in their three previous contests.
Irish light-welterweight Kellie Harrington is through to the final of the World Championships after an emphatic semi-final victory over Canada's Sara Cali in Kazakhstan.
The Dublin fighter is guaranteed at least a silver medal ahead of Friday's final against China's Wenlu Yang in the non-Olympic weight.

Cdr Sarah West, 42, took charge of Type 23 frigate HMS Portland in May 2012, but left her vessel last month.
A Royal Navy spokesman said Cdr West had now been "removed from command" but gave no further details saying it was an "internal matter".
She would be reappointed to another post, the spokesman added.
Cdr West had been on board Plymouth-based HMS Portland on a deployment since January.
Last month, the Ministry of Defence confirmed it was "aware of an allegation of a breach of the code of social conduct" on board the ship, which it said it was "treating seriously".
The code governs personal relationships, which are not permitted if they compromise operational effectiveness.
Confirming her removal, a Royal Navy spokesman said the case was an "internal matter between the individual and her senior officers".
"Cdr West will continue to serve in the Royal Navy and she will be reappointed to a post where her skills and experience can be used to best effect," the spokesman added.
The spokesman said Cdr West's second-in-command had taken over the running of HMS Portland.
When she took up her post in May 2012, Cdr West said it was "definitely the highlight of my 16 years in the Royal Navy so far".
Cdr West, who grew up in Lincolnshire and joined the Royal Navy in 1995, previously commanded four minesweepers. There has been no confirmation that Cdr West had a relationship with a fellow officer.
London 2012 gold medallist Katie Taylor suffered a second defeat in six weeks as she was beaten in the World Championship lightweight semi-finals.
[NEXT_CONCEPT]
The first female commander of a major Royal Navy warship has been removed from her post following allegations of an affair with one of her officers.