The Croatian won the grass-court title in 2012 and finished as runner-up to Andy Murray in 2013, but was beaten 6-4, 6-4, with a single break of serve in each set deciding the outcome.
Matosevic, who reached the final of a grass event in Nottingham last week, saved a break point in each set on his way to victory, and said he was unconcerned at having lost all three of their previous meetings.
''I feel like I have been really close to beating him all previous times,'' said Matosevic, who was coached by Australian great Mark Woodforde. ''Australian Open I played him, had 11 break points. Didn't take any. Monte Carlo just a month and a half ago, I was a break up in the third and lost to him.''
Cilic blamed a lack of grass-court preparation for his defeat.
''I came this year a bit later than usual,'' he said. ''Just maybe I felt I didn't adjust myself too good on grass yet. In the movement I felt it the most. I slipped also a couple of times, and then I was running a little bit too careful on some balls.
''But Marinko played really well, very consistent from beginning till the end. He wasn't giving me too many opportunities.''
In second-round matches, second-seeded Tomas Berdych struggled to a 7-6 (3), 5-7, 6-4 win over Australian qualifier James Duckworth, and fourth-seeded Grigor Dimitrov of Bulgaria defeated British wild card James Ward 7-5, 6-3.
Jarkko Nieminen of Finland saved three match points before defeating Benoit Paire of France 2-6, 6-3, 7-6 (1), surrendering the first four games of the final set and then saving two match points in the ninth game, and another in the 12th to force the tiebreaker.
He next faces Russian Dmitry Tursunov, who defeated Dutchman Igor Sijsling 6-3, 6-4.
Spain's Feliciano Lopez needed three sets - and two days - to overcome Serbia's Dusan Lajovic 6-3, 6-7 (3), 6-1 in a match that was suspended overnight because of rain. His next opponent is four-time champion Lleyton Hewitt.
Seventh-seeded South African Kevin Anderson reached the third round with a 6-2, 6-3 win over Britain's Daniel Evans, and there were first-round wins for Vasek Pospisil of Canada, and Radek Stepanek of the Czech Republic.
- Sports & Recreation
- Marin Cilic
- Marinko Matosevic
- Andy Murray