After 12 absorbing rounds of boxing in front of more than 50 000 people, Australian Horn ripped the WBO welterweight world title away from his opponent, leaving Pacquiao with serious questions on his future in the ring.
The Filipino was hot favourite to win his 60th fight and wanted another shot at Floyd Mayweather Jr.
But the 38-year-old was immediately challenged to a rematch by Horn after the three judges scored the contest 117-111, 115-113, 115-113 in his favour.
Pacquiao was knocked off his stride by the aggression of the taller and heavier Australian in the early rounds, but looked to have weathered the storm as the fight wore on and Horn tired.
With blood pouring from both sides of his forehead after accidental headbutts, the famous southpaw launched a moerse klomp houe on Horn that nearly ended the contest in round nine.
The rundown Australian battled gamely on through the final three rounds, though, to win a decision that would have surprised many after Pacman's late show.
Pacquiao has now lost four of his last nine fights and this latest setback could signal the end of his career, with trainer Freddie Roach saying in the build-up he would encourage his charge to retire if he was beaten by Horn.
The veteran had bounced back from his defeat to Floyd Mayweather in 2015 by overcoming Tim Bradley in their rubber match and eased past Jessie Vargas to become a world champion once more.
Of the fight, Pacquiao says: “Very tough. I didn’t expect that tough.
“It’s okay, it’s part of the game. That’s the decision of the judges, I respect that.”