Britain's Heather Watson squandered five match points before losing to American qualifier Jennifer Brady and crashing out of the Australian Open.

Watson missed all five opportunities to reach round three in a tense deciding set, lasting 86 minutes, having also served for the match when leading 5-4 in the second.

The British number two allowed nerves to get the better of her on Court 13, however, as Brady snatched a shock 2-6 7-6 (7/3) 10-8 victory in her first ever grand slam main draw.

Watson, ranked 81st in the world and 35 places above her opponent, was strong favourite to equal her own best run at a major tournament, particularly after knocking out Australia's Samantha Stosur in round one.

The 24-year-old has a tendency, however, to become embroiled in grinding three-setters and she simply lacked the ruthlessness here to close out a contest she certainly should have won.

Brady, meanwhile, progresses to play Russia's 14th seed Elena Vesnina, who was a surprise semi-finalist at Wimbledon last year.

Watson broke three times to clinch the first set in 28 minutes and broke again in the opening game of the second when another Brady forehand flew out.

Perhaps due to complacency, or just a lapse in concentration, Watson then handed her opponent a lifeline with a poor service game and the match was a battle thereafter.

At 4-4, Watson broke with a driving forehand winner to leave her serving for the match but, again, she handed the initiative straight back, this time a double fault drawing Brady level and in sight of a decider.

Brady began the tie-break with an ace and then stormed 5-1 clear after Watson missed a forehand volley. With four set points, Brady converted at the second time of asking.

Watson had five chances to win the match in the final set but was unable to take them (Getty)

Watson cranked up the pressure at 2-1 in the third set, with two break points, and then five more in a lengthy fifth game, which she led 0-40 but again failed to see out.

There was another break point, her ninth of the set, at 4-3 but Brady managed another escape and then it was Watson's turn to defend as the American had three chances to serve for the match. Watson, however, held, clinching a nervy game to lead 6-5.

Brady drove a forehand long to give Watson two match points but she surrendered both, the second with a limp forehand into the net. Another match point came and went before Brady shot an ace to tie at 6-6.

American qualifier Jennifer Brady fought back in the third set to beat Watson (Getty)

Three games of relative sanity passed by until Watson led 8-7 on Brady's serve. A backhand wide offered the Briton her fourth and fifth match points but two strong serves ensured Brady again survived.

It seemed inevitable Watson would pay for her wastefulness and so it proved as she served a double fault to put Brady 9-8 up and serving for the match.

She moved 40-0 up for three match points and while Watson saved two she could not rescue a third as Brady slapped away a volley to seal the most unlikely of victories.