The Russian fell apart in the second set after Korda won the first on a tiebreaker taken to the brink, with the match finishing 7-6 (10/8), 6-2.
“I should have won the tiebreak but didn’t,” said the world number three afterwards.
“I was, for sure, down mentally after such a first set… In the tiebreak, he actually didn’t play that good (compared to the rest of the match). I didn’t use this opportunity and I’m going home.”
Medvedev fell three games behind an emboldened Korda in the second set, but looked like he might be about to make a comeback with a blistering win in the fourth game.
But the American fought back, taking the next game, and Medvedev grew increasingly agitated, gesticulating in frustration and smashing his racket.
“I feel awesome, I played an incredible match,” said 23-year-old Korda at the end, thanking the crowd for their enthusiasm.
The match’s thrilling rallies drew gasps and exclamations from spectators as the two battled it out.
“We played a really good tiebreaker, you know, it was up and down from the beginning… I’m happy to be on the winning side of it!” Korda added.
Medvedev had said the game would be “interesting” for him beforehand, referencing his loss to Korda in their last meeting.
At a press conference after Sunday’s match, looking deflated, he said he would sum up his time in China as “not amazing”.
He made the final of Beijing’s China Open this week but lost to Italian Jannik Sinner.
“Shanghai is really important… I wanted to do better,” Medvedev said. “I felt good being here, so I’m a little bit, not a little bit, I’m very disappointed to lose.”
His elimination was watched from the courtside by tournament top seed Carlos Alcaraz.
Medvedev said the 20-year-old Spaniard and Sinner, who also beat Alcaraz in Beijing this week, were the top contenders for his title now.
“But at the same time… Maybe Jannik loses today, Carlos loses tomorrow, and it’s all over… That’s why tennis is interesting, we can never know,” he said with a wry smile.
Earlier, world number nine Casper Ruud continued his smooth progress through the tournament with another straight-sets win, this time against the United States’ Christopher Eubanks.
Ruud appeared in control throughout against the 32nd-ranked American, with the third-round match ending 6-4, 6-2.
The Norwegian said he was pleased he’d held his nerve against a “tough, fast” player.
World number seven Andrey Rublev is through to the third round after defeating France’s Quentin Halys 6-4, 7-5.
Asked about his compatriot Medvedev, Rublev said his playing this year had been “something unreal”.
“That he lost here, it sometimes can happen,” Rublev said. “To most of the players it’s happened more often.” Two top-20 players exited the tournament in the second round on Sunday.
Britain’s 16th-ranked Cameron Norrie was defeated by the United States’ JJ Wolf, ranked 51st.
And 59th-ranked Lorenzo Sonego took out Frances Tiafoe, the world number 13, 2-6, 6-2.
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