Halep took advantage of an error-strewn display from the defending champion to make it two wins out of two in the Red Group, coasting to a 6-0 6-2 victory in just 65 minutes.
An out-of-sorts Williams was made to pay for 36 unforced errors and seven double faults as Halep beat a player ranked in the top three in the world for the first time at the ninth attempt.
Eighteen-time grand-slam winner Williams allowed her frustration to get the better of her as the ruthless Halep took a giant stride towards the semi-finals in her first appearance in the season-ending event.
The Romanian wrapped up the first set in just 20 minutes, with Williams suffering the embarrassment of losing 6-0 in a set for the first time this year and only the eighth time in her remarkable career.
Williams struggled on serve throughout and French Open finalist Halep made her pay, taking three of the four break points that she fashioned and not giving her opponent an opportunity to break back.
Six of the world number one's double faults came in the opening set and that set the tone for a one-sided match, as Williams, who beat Ana Ivanovic in the first game of the tournament, was unable to turn the tide.
Halep broke yet again in the first game of the second set and fended off two break points to go 2-0 up.
It took the favourite 37 minutes to get on the board by making it 2-1, but even that proved to be a false dawn as Halep had a spring in her step and broke again to lead 4-1.
Williams was unable to take a break point that might have given her a glimmer of hope in the following game and Halep sealed a memorable victory by converting her third match point to leave the defending champion stunned.