Konta, who won 21 of her previous 22 matches and beat world number two Simona Halep on Wednesday, served for a place in the last four in the decider.
However American Williams, 35, won four games on the trot to set up a semi-final against Roberta Vinci.
Konta's form will see the 24-year-old take over as British number one.
She started the year 150th in the world but is now 66th and will next week pass compatriot Heather Watson in the rankings.
Williams, the current world number 24, has won seven Grand Slams since turning professional in October 1994.
"I went on court to win and to do my best," said Konta. "I gave my all. It just wasn't enough.
"I lost to a pretty incredible champion. She played an incredible match. I just feel very fortunate that I got to share the court with her."
Konta made Williams work hard for the victory, becoming the first person to take a set off her at the Wuhan Open after losing the first.
She then led 5-3 in the final set and looked on course to record another upset at the tournament.
However Williams drew upon all of her experience to grind out the victory, coming out on top in a breathtaking final game that saw the crowd applaud midway through one particularly impressive rally.
"Johanna played so well. She has had a wonderful summer," said Williams.
"It seemed like I was finished but I felt the energy from the crowd."

The flight was from Aberdeen to Wick.
More follows.
Britain's Johanna Konta was beaten 6-4 3-6 7-5 by former world number one Venus Williams in the quarter-finals of the Wuhan Open.
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A flight is returning to Aberdeen International Airport after an emergency was declared.