Selby was 4-0 down at the interval before staging a comeback which made the score 4-2. But Xiao recovered his composure to put the reigning UK Champion to the sword.
The 36-year-old scored heavily to punish Selby. It was a superb peformance from the Chinese player.
Xiao told the BBC: “It’s absolutely good. The crowd was good, everything is perfect. I loved this.
“Thanks to everyone for coming out. We both played well and I just put him under pressure going 4-0 up.
“He came back and put me under pressure. It was a good game.”
Earlier on Sunday, defending Masters champion Murphy was also eliminated in the opening round. Murphy said it was the worst he’s ever played at the blue riband-event.
“I didn’t play well at all, it is possibly the worst performance certainly of my season, and perhaps in my history of playing at the Masters,” he said. “I’m very disappointed.
“None of my game performed well. I didn’t expect to play like that. I thought Wu played a wonderful match today, and I think he will be a handful here for whoever he plays next.”