At 5-0 and a point from winning the first set, Williams lined up in the ideal position for an overhead but then completely shanked it, spraying the ball wide. She screamed and put a hand over her face.
"It was an awkward smash. Then she missed one and I felt a little better," Williams said. "I felt like, 'Am I losing my mind out here?'
"Everyone sometimes hits a shot that's a little bit insane -- you just got to allow yourself to get over it."
The 92nd-ranked Arn saved another set point before holding serve for the first time. Williams responded by winning the next five games before Arn held again. The match ended in 59 minutes Saturday, on consecutive double-faults by the Hungarian.
"I told her it was an honor to play against you," the
32-year-old Arn said. "And she told me, 'Oh, you are so sweet.' I'm a big fan of hers. She's the real No. 1."
Williams has won the Australian Open five times, including back-to-back titles in 2009 and 2010. She didn't get to defend her title last year due to injury.
"I'm nowhere near where I want to be," said Williams, who has won her last 17 matches at Melbourne Park. "I'm just trying to play through it. A little rusty -- just trying to play through my rust."
She badly sprained her left ankle in a warmup tournament at Brisbane two weeks ago, casting doubt again on her participation at Melbourne, but the 13-time major winner has shown no signs of being restricted in her first three matches -- she has only conceded 11 games.
Williams is the only American left in the singles at the Australian Open after Vania King lost earlier to former French Open winner Ana Ivanovic -- the last U.S. man exited the tournament Friday when John Isner lost in five sets to Spaniard Feliciano Lopez.
"I'm definitely going to keep representing the flag and doing the best I can," Williams said.
Fourth-seeded Sharapova routed Germany's Angelique Kerber 6-1, 6-2 to continue her fantastic start to the tournament. The 2008 Australian champion has only dropped five games in three rounds and next plays No. 14 Sabine Lisicki, who beat two-time major winner Svetlana Kuznetsova 2-6, 6-4, 6-2.
Sharapova and Petra Kvitova are among the four women who can claim the No. 1 ranking at the end of the tournament. They could play each other in the semifinals, although Kvitova insisted she hasn't looked that far ahead.
"I don't know who lost and who win," Kvitova said. "No, really, for me doesn't care."
Kvitova reached the round of 16 when Maria Kirilenko retired with a left thigh injury while trailing 6-0, 1-0 after 38 minutes.
Information from The Associated Press was used in this report.