An out-of-sorts Williams was beaten 6-2 6-0 in just 65 minutes in Singapore on Wednesday after an error-strewn display.
The world number one was made to pay for 36 unforced errors and seven double faults, as Halep took a giant stride towards the semi-finals of an event she is playing in for the first time.
Williams pulled no punches with her assessment of a performance that leaves her facing a battle to reach the last four of the tournament she has won for the last two years.
"My forehand was off today. I guess it went on an early vacation." said the American, who faces Eugenie Bouchard in her third and final Red Group game on Thursday.
"Lord knows my serve was as well. My serve, I don't even know. My serve was at best in the 10 and under division in juniors.
"Yeah, it was actually embarrassing. I think embarrassing describes the way I played."
She added: "It's odd. I feel like once you lose you should be out of an event, you know, that's what we're used to. But I'm still hanging in there, so we'll see what happens.
"I played the tournament when it was an elimination. This format is fun because you can lose and keep winning. But I'm in a situation where I'm going to have to win my matches because I didn't win many games today at all."
Romanian Halep, ranked fourth in the world, savoured the moment after beating Williams for the first time and making it two wins out of two on her WTA Finals debut.
"It's the biggest match in my life, so I can't put into words how I feel right now. I feel very happy! I just want to enjoy it," said the 23-year-old.
"It was always my dream to beat one of the Williams sisters, but of course without the help of the crowd I wouldn't have been able to play this way.
"Also my team, my Romanians, I feel so amazing right now. I will work hard for the rest of the tournament and then we will party for sure.
"I don't think it was her best day today, but I played really well, I was very aggressive and took the ball early, moved up the court very well, served very well - I've found my best tennis again. It's crazy."