Despite winning the first set, the Wimbledon champion was unable to contain the raw power of Raonic, who triumphed 4-6 7-5 6-3 in a little over two hours.
Raonic had won two of his previous three matches against Briton Murray and he improved on his head-to-head record with another impressive display built around his booming serve.
He blasted 15 aces past his bewildered opponent, who is one of the best returners in the game, and won a staggering 83 per cent of points when he landed his first serve.
Murray did break Raonic's serve in the opening set and again in the deciding third but struggled to hold his own serve against the 6ft 5in (1.96 meter) tall Canadian.
Although he has not made it past the fourth of any grand slam, the 23-year-old Raonic has been steadily climbing the rankings since he announced his arrival by winning the 2011 San Jose Open and being named as the ATP's newcomer of the year.
He won two more titles in 2012 and again in 2013 and made his first Masters finals in Montreal last year.
His next opponent in the quarter-finals will be Ukrainian giant killer Alexandr Dolgopolov who followed up his upset victory over Rafa Nadal on Monday with a comprehensive 6-2 6-4 drubbing of Italy's Fabio Fognini.
With five of the top nine seeded players eliminated from the prestigious event in the Californian desert, the title is wide open.
Later on Wednesday, Roger Federer, Novak Djokovic and Australian Open champion Stanislas Wawrinka were all due to play their fourth-round matches.
(Reporting by Julian Linden in New York; Editing by Ed Osmond)