Williams started the match well against Muguruza and lead 3-0.
But she was broken back and Muguruza then won six games in a row to drop the first set 6-3.
Before the second set, Williams was seen by the trainer, who took her blood pressure.
And after playing one more game, Williams spoke to the trainer again and was heard saying: ‘I can’t breathe’.
She then signalled she was unable to continue and shook Muguruza’s hand before leaving the court.
Over 30 minutes after leaving the court, the official reason for Williams’ retirement was given as “viral illness”.
After the match, Muguruza sent her best wishes to Williams.
“We’ve played many times and it is always super tough and super exciting.
“It is never good to see someone that is maybe not feeling well.
“I wish I’m going to see her soon, and better!”
Muguruza will now face either Kiki Bertens or Johanna Konta in the round of 16.
Williams is scheduled to play at the Miami Open later this month but her participation may now be in doubt depending on her condition.