"He served very well, very precise. There's not much I could do.
"Of course, I was not pleased with my performance overall. But I have to congratulate my opponent today."
The Serb had won six of the previous nine Open titles but declined to guarantee he would be back at Melbourne Park in 2018 in a position to chase a seventh crown at the age of 30 and with a new family focus.
Djokovic has battled form, fitness and "private issues" since finally winning a maiden French Open title last year to become the first man since Rod Laver almost half a century ago to simultaneously hold all four major crowns.
"I just want to go home, spend time with my family, and that's all," he said on Thursday.
After reigning in Paris, Djokovic lost in the Wimbledon third round to Sam Querrey, his Olympics opener against Juan Martin del Potro and the US Open final to Stan Wawrinka, before going down to Istomin at Melbourne Park.
Istomin, who warmed up for the Australian Open at the $70,000 Bangkok Challenger, was on the attack from the outset.
Cramp set in during the third set but the Uzbek, who won entry to the tournament through the Asia-Pacific wildcard playoff, responded in the fourth.
At 2-2 in the fifth, Istomin - metres behind the baseline - lashed a crosscourt backhand past Djokovic.
It set up what turned out to be the only break of the deciding set.
"I feel sorry for Novak, (but) I played really good," the 30-year-old Istomin said."I surprised myself."
Istomin had only claimed one set in five previous matches against Djokovic.
"I never underestimate any opponent," said the Serb.
"It doesn't matter which tournament I play in or which round.
"I try to give the best that I can. I have respect for everybody.
"Him playing this well, it's amazing.
"He played obviously above his level. You've got to give him credit for that."
Istomin next faces 30th seed Pablo Carreno Busta of Spain.
Djokovic at the Australian Open
2017 - 2R: lost to Denis Istomin.
2016 - Champion: def. Andy Murray.
2015 - Champion: def. Andy Murray.
2014 - QF: lost to Stan Wawrinka.
2013 - Champion: def. Andy Murray.
2012 - Champion: def. Rafael Nadal.
2011 - Champion: def. Andy Murray.
2010 - QF: lost to Jo-Wilfried Tsonga.
2009 - QF: lost to Andy Roddick.
2008 - Champion: def. Jo-Wilfried Tsonga.
2007 - R16: lost to Roger Federer.
2006 - R128: lost to Paul Goldstein.
2005 - R128: lost to Marat Safin.
- AAP