Prajnesh, who had entered the main draw of the men's singles event as a lucky loser in the qualifiers, fought for two hours as rain played spoilsport before he went down 4-6, 2-6, 5-7 at Rod Laver Arena.
The match was earlier scheduled to be played on Monday but was postponed for the same reason.
Prajnesh, who lost the first two sets without any fight, showed resilience in the third set when he broke Ito to take a 2-1 lead. The Japanese broke back immediately, then the World No 122 ranked Indian erred again when the set was level at 5-5.
The 30-year-old was making his fifth straight appearance in the main draw of a Grand Slam event having earlier played in the Wimbledon, French Open and the US Open due to his better rankings. Ito will now take on World no. 2 Novak Djokovic in the second round.
With Prajnesh's ouster, India's campaign in the singles event of the tournament has ended.
In men's doubles, India's Divij Sharan and his New Zealand partner Artem Sitak will face Spanish-Portuguese pair of Pablo Carreno Busta and Joao Sousa in the first round, while Rohan Bopanna and Japanese Yasutaka Uchiyama will play 13th seeded Bob and Mike Bryan of US.
In the women's doubles, Sania Mirza and Nadiia Kichenok of Ukraine will take on Chinese combination of Xinyun Han and Lin Zhu in the opening round.
Sania, who is making a return to the circuit after a two-year break, last week won the title at Hobart International.
( With inputs from IANS )