After dropping the first set, Cilic broke his opponent twice in the second to force a decider but Karlovic clinched the tie-breaker to seal victory.
Cilic, sixth in the race to November’s elite eight-player ATP Finals in London, had won his last two matches against Karlovic, who blasted 20 aces to his opponent’s nine.
“It’s a gamble with him,” Cilic said of his compatriot. “He goes all in or nothing. It’s always difficult.
“He was serving really well towards the end of the match. I couldn’t get into his serve. It can happen with Ivo. It’s always tricky.
“The game, I’m feeling it’s on the spot. Though I lost today, it’s unfortunate, bad luck, but I’m going with positive energy into the next weeks to finish the season well,” added Cilic who is seeking his first ATP Finals appearance in London.
It proved a good day for big-servers as world number 14 John Isner belted down 22 aces to beat Spaniard Pablo Andujar 7-6(5) 1-6 6-3.
The American, who lost to Tomas Berdych in the China Open quarter-final last week, won 71 percent of his service points.
“Beijing was great last week,” said Isner after his 38th win of the season. “I had a pretty good tournament. Got my tail kicked in the quarters. But I’m playing pretty well.
“I’m still alive here. I’m glad I’m not on a flight home tomorrow. It’s all good. Playing better away from the States is something I’m always trying to do and I feel like it’s something I’ve done so far.”
Argentine Juan Monaco downed Portugal’s Joao Sousa 6-2 7-6(4) to set up a second-round clash with eighth seed Milos Raonic.
Grigor Dimitrov, currently 11th in the race to London leaderboard, beat Denis Istomin 6-3 6-3 to move into the second round while Frenchman Richard Gasquet beat compatriot Jeremy Chardy 7-6(7) 6-2.
Gasquet’s second win in two meetings with Chardy pits him against Berdych who was swept aside by Novak Djokovic in the China Open final on Sunday.
Djokovic, Rafa Nadal and Roger Federer are together this week in Shanghai for the first time since Wimbledon having already secured their places at the London season finale. (Reuters)