Murphy was the first to go, dispatched by Wu 6-2 in the first match of the tournament, before Wu's compatriot set up a quarter-final between the pair following his victory by the same scoreline in the day's second showdown.
'Worst performance of my season'
Last year Murphy played impressively all the way through to his victory over Kyren Wilson in the final, but on Sunday he was soundly beaten by the world number 13.
Wu swept the first three frames, including an impressive clearance of 137 in the second, before winning a tense fifth frame with his opponent on a black-ball finish on his way to securing victory in his debut outing at Alexandra Palace.
Wu told the BBC: "I felt a bit of pressure when I entered the stadium because it was the first time I've played in such a big stadium and the fans were so enthusiastic.
"After the first frame, I felt a bit more relaxed and I totally enjoyed the atmosphere. It's definitely a great achievement for myself - my first time playing at the Masters and the first time beating Shaun Murphy."
Murphy said he was "as shocked as anyone" that he had been sent packing in such comfortable fashion.
"I've been looking forward to today for a year, walking out as champion, but I enjoyed the first 10 minutes," he told the BBC.
"I didn't play well, certainly the worst performance of my season, maybe the worst in the Masters.
"I'm very disappointed, none of it was there. I felt everything I touched was not there. I've been working very hard, practising hard, playing a lot of snooker, so I didn't expect to play like that and I'm as shocked as anyone."
The Englishman paid tribute to his 22-year-old opponent despite his own disappointment: "Wu looked calm, looked at ease and fully deserved his win. He will be a handful for anyone he plays."
Selby's wretched Masters run continues
Xiao, recent winner of the Wuhan Open, got off to a flying start in his first Masters appearance, racing to a 4-0 lead against an out-of-sorts Selby with breaks of 95, 62, 76 and 77.
There was a brief fightback from the 42-year-old as he capitalised on an errant safety shot by his opponent to win the next two frames, but after missing a regulation blue to the side pocked in the seventh frame, Xiao would go on to to take a 5-2 lead.
The eighth frame was the nerviest of the lot, with both spurning numerous opportunities to win it, but after Selby missed a yellow on the final stretch, Xiao stepped up to win the frame and the contest to secure a maiden place in the last eight.
"This was my first time playing (here), I was very nervous," he told the BBC. "I think we both played well.
"I was 4-0 up so I gave Mark a little bit of pressure, but after that Mark gave me a lot of pressure, so it was a good game."
For Selby, it represents another disappointing Masters, as his run of failing to make it past the quarter-final stage of the iconic tournament since 2014 now stretched by another year.
"I played well to go 4-2, then I got a good chance in the next one and I'm just trying to grip the blue to hold for the red in the corner and just flicked a bit of side on it and just missed it high," he told the BBC.
"If I win that frame I fancy winning the match because I felt like I had a little bit of momentum.
"I'm gutted because I've come here playing well, I feel good. Even though I've lost I still feel good in my game. It's just one of those to forget I think."