Sharapova and Watson out in Auckland
The three-times grand slam winner, who had chosen to warm up for the Australian Open by entering the Auckland tournament rather than her normal schedule of playing exhibition matches, struggled with her rhythm in the swirling wind.
She was broken twice in the first set by the 31-year-old Arn and made numerous unforced errors in the second to crash out in a match lasting 91 minutes.
"I started off really slow, got down two breaks and I think she gained a tremendous amount of confidence from that," Sharapova said. "I had my chances in the second (set), but I didn't play the same way I had played to get there.
"Obviously I would have loved to play a few more here and be the winner. But that's the way it goes. You look forward to the next one.
"That's the good thing about tennis."
Arn will now meet fourth-seeded German Julia Goerges who beat Ukraine's Kateryna Bondarenko 5-7 6-2 6-2 in the last quarter-final that was played in the final evening session of the tournament.
Sharapova's presence had helped effectively sell-out the tournament by the first day and her defeat disappointed those hoping for a final against champion and second seed Yanina Wickmayer.
Wickmayer had earlier made sure of her place in the semi-finals when she beat Romania's Simona Halep 6-0 6-2 in a little over an hour in the first match on centre court and set up a showdown with China's Peng Shuai, who beat British qualifier Heather Watson 6-4 7-5.
"I feel very happy, this is the first week of the year and I'm really happy to be playing well," said Wickmayer, who extended her unbeaten run in Auckland to eight matches. "I'm in the semis so I guess this tournament is lucky for me."