Djokovic lost two sets to one to Germany's Alexander Zverev, the world's fifth-ranked player, who has now reached the final in his first Olympic Games.
Djokovic's defeat means he can no longer complete a 2021 Golden Slam, the name given to winning all four Grand Slam tournaments and an Olympic gold medal in the same calendar year.
No male player has achieved the feat, but Djokovic looked set to do so after having won the Australian Open, the French Open, and Wimbledon in dominant fashion.
It was not meant to be, thanks in large part to a blistering display from Zverev.
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Djokovic took an early lead with a commanding first set, beating the German 6-1 with ease and seeming poised for a trademark dominant performance to make the finals.
Zverev had other ideas, however, fighting back to take the second set 6-3 in the sweltering heat of a Tokyo summer evening.
In the third set, Zverev did to Djokovic what Djokovic had done to him an hour earlier - bludgeoning the world No. 1 to secure a 6-1 final-set victory and a place in the final against Karen Khachanov of the Russian Olympic Committee.
After the match, an emotional Zverev appeared to apologize to Djokovic for ending his dream of a Golden Slam, telling his felled rival at the net: "You're one of the greatest of all time. I'm sorry for this."
It is only the third time Zverev has beaten Djokovic in the nine times they have faced each other with the last time the German won coming back in 2018.
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Djokovic will now have a chance to equal his best ever Olympic finish when he competes for the bronze medal against Carreno Busta. The Serbian won the third-place prize at Beijing 2008.
Speaking earlier this week, Djokovic said conditions in Tokyo were "very tough" and the hardest he had played in during his professional career.
"I've played tennis now professionally for 20 years, and I've never faced this kind of conditions in my entire life on a consecutive daily basis," Djokovic said, according to The Telegraph.
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