Murray had been dreaming of home glories once again after winning back-to-back matches at a grand slam for the first time since his hip problems started in 2017.
But 10th seed Shapovalov comfortably beat Murray 6-4 6-2 6-2 - and it comes after Dan Evans’ loss to Sebastian Korda.
It means Cameron Norrie, who plays against Roger Federer on Saturday, is the only British player left in the men's singles. And Emma Raducanu is the only British player left in the women's singles.
Murray spoke after his win over Otte on Wednesday about how slippery he had found Centre Court in Wimbledon. He changed his shoes after falling twice in the first two games.
In Friday's game, his opponent Shapovalov drove vicious groundstrokes deep into the court, exploiting his opponent’s lack of weight of shot, to move into a 5-1 lead.
From there, Murray mounted a comeback, hitting through the ball better. Shapovalov missed one chance to serve it out and then found himself under intense pressure the second time.
Murray had three chances to get back to 5-5 but the 22-year-old Canadian held firm each time, saving the third with a superb stop volley.
The momentum going into the second set appeared to favour Murray but he made a bad start, dropping serve with a double fault and then going a double break down.
The 34-year-old was pulling off some fine shots but not consistently while his movement simply was not sharp enough to keep him in long rallies.
Murray tried to stage another comeback but Shapovalov, who fell over multiple times on the slick surface, saved a succession of break points at 1-4 and had no problems serving out the set this time.
After racing through the third set, the Canadian will be playing against eighth seed Roberto Bautista Agut in the fourth-round.