Woods fell 3-down after the first 18 holes, then could only trim his deficit to 1-down on the way to a 4-and-3 loss to the 2003 PGA champion.
Looking nothing like the dominant player who has had fields battling for second place, Woods led for the first two holes of the match after Micheel bogeyed No. 1.
Micheel, who finished as runner-up to Woods at this year's PGA Championship, birdied the third hole to square the match, and Woods never led again.
'He did what he had to do today,' said Woods, who was 2 under. 'He kept the ball in play and kept putting the pressure on me. I didn't make any putts today and it was very frustrating and I couldn't put the pressure back on him.'
Micheel won three more holes in a row after No. 3, taking a 3-up lead when Woods missed a 5-foot par putt at the sixth.
Woods got within 2-down when Micheel bogeyed the seventh, but fell back to 3-down with a three-putt bogey at the ninth. He dropped as many as 4-down, but was able to keep it within three when he birdied the 18th and Micheel made bogey from a pair of bunkers.
A par at the 19th hole and a birdie at the 20th -- on a 15-foot putt at the Wentworth Club's par-3 second -- got Woods within 1-down. But Micheel made two birdies in a four-hole stretch to go 3-up.
Woods was still 3-down headed to the 30th hole -- the par-5 12th. He made his first birdie in 10 holes, but Micheel went 4-up when he made eagle.
Both players parred the next three to give Micheel the win.
'He beats most of us more times than we get a chance to beat him,' Micheel said. 'I finish second to him more times than he finishes second to me, but he didn't play his best today.'
Micheel was able to do what the rest of the field needed him to do -- knock off the player who was favored to walk away with the $1.86 million first-place prize.
The player who, in a six-week span, had won the British Open, the Buick Open, the PGA Championship, the Bridgestone Invitational and the Deutsche Bank Championship.
'This certainly wasn't expected,' Micheel said. 'I just was out trying to have a good day, play my game, hit the ball in the fairway and make my putts.
'We each had our share of bogeys and mishaps, but it feels really special to beat him. He played pretty well but did not make the putts he usually does.'
Also a surprise loser, Jim Furyk was knocked out when he dropped a 4-and-3 decision to European Ryder Cup rookie Robert Karlsson of Sweden.
Expected to anchor the U.S. Ryder Cup team with Woods and Phil Mickelson, Furyk entered the tournament ranked No. 2 in the world -- his highest ranking ever -- after winning the Canadian Open last week.
He didn't have a bogey until the 25th hole, but his steadiness wasn't enough. Karlsson shot a 64 to go 5-up after the first 18 holes and was never ahead by less than 3-up the rest of the way.
'This is just a fantastic bonus,' said Karlsson. 'Going against the second player in the world, you expect a pretty rapid exit.'
In three other matches involving players who will be at the K Club next week, Colin Montgomerie defeated David Howell, 1-up, in a match between Ryder Cup teammates; Paul Casey routed Retief Goosen, 6 and 4; and Luke Donald made it four victories for European Ryder Cuppers with a 1-up win over Tim Clark.
The European side was also encouraged by the news that teammate Darren Clarke, playing for the first time since the death of his wife, Heather, from cancer last month, shot a 4 under in the Madrid Open.
'It's nice to see him doing well. I wish him all the best this week,' Donald said. 'To play well this week and get a few competitive rounds under his belt, especially some rounds under par, will do him a lot of good.'
Not that all the players saw this week as a precursor to the Ryder Cup.
'This is one of the biggest tournaments I've ever played in, but it's definitely not a rehearsal for next week's Ryder Cup,' said Karlsson. 'It is a fantastic opportunity to practice some match play and an extra bonus that I get more than one game here.'
In the other matches Thursday, defending champion Michael Campbell opened with a 3-and-1 victory over Simon Khan; Mike Weir was a 3-and-2 winner over Adam Scott; and six-time Match Play champion Ernie Els was ousted by Angel Cabrera, 2 and 1.
Cabrera clinched that match when Els hooked his drive badly at the 35th hole, knocking into some trees and out of bounds.