The German world number one's exit followed that of men's top seed and world number one Andy Murray, who lost to Mischa Zverev earlier in the evening on the same court.
New Yorker Vandeweghe claimed a place in the quarter-finals at Melbourne Park for the first time by blasting six aces and 30 winners to simply overpower Kerber.
It was the earliest exit by a reigning women's singles champion at Melbourne Park since France's Amelie Mauresmo also went out in the fourth round in 2007.
"I was not feeling the ball at all tonight. I was not playing good from the first point," said 29-year-old Kerber, who made 15 unforced errors.
The American world number 35 smashed a backhand crosscourt winner to take the single break of serve she needed to claim the opening set in 33 minutes.
Kerber hit back by breaking her 25-year-old opponent on a double fault in the opening game of the second set but the aggressive Vandeweghe would not be denied.
Taking advantage of a series of uncharacteristic Kerber errors, Vandeweghe ramped up her big forehand to break back for 3-3 and another backhand winner broke the German again and gave her the opportunity to serve for the match.
Kerber was by now wandering around the backcourt looking disconsolate and sealed her fate, as well as Vandeweghe's victory, when she looped a return far beyond the baseline after 68 minutes.
"I was feeling like crap out there," said Vandeweghe.
"Last year I came here and didn't even win a match and here I am now. It's the confidence you get from having a full off-season with no injuries."
Kerber, who also won the U.S. Open and reached the final at Wimbledon last season, said she was still confident that 2017 could still be another good year.
"This is the first grand slam of the year," she said. "I tried my best. Of course, there are few more tournaments to come with January. I think that I can still have a good year.
"I can still improve my tennis. I will try my best to come back stronger."