After losing his first service game of the fourth set, Kyrgios appeared to lose some competitiveness against his opponent, Andreas Seppi.
"Even I'm at a loss for words," said McEnroe, who was broadcasting the match for Eurosport. "Overall I would call it a damn shame because I think he's the most talented guy in the world [at] 21 and under -- maybe even at 29 and under.
"He could be the best player in the world, but mentally he's No. 200 in the world, and I think at critical moments it showed."
Later, down a break at 6-5 in the fifth set, Kyrgios attempted an ill-timed tweener, further agitating McEnroe.
"It's OK to show your emotions, and I'd like to see that in a one-on-one game when you're out there by yourself," McEnroe said, "but when he goes through those periods when he's not competing, that it's just a black eye for the sport. And it's a black eye for him."
The 89th-ranked Seppi clinched the three-hour, nine-minute match 1-6, 6-7 (1), 6-4, 6-2, 10-8, but this performance was about what Kyrgios failed to accomplish.
When asked about McEnroe's comments in his postmatch news conference, Kyrgios appeared unbothered, if not aloof.
"I mean, John McEnroe, was it John McEnroe?" Kyrgios said. "Good on him. Great career. Good on him."
Kyrgios, who suffered a knee injury playing basketball several weeks ago, was circumspect about the loss.
"It's obviously disappointing, but it was ultimately a pretty fun match," Kyrgios said. "He's a great guy and he deserved it, so. ... I'm not going to beat myself up about it. It could have gone either way."
Kyrgios was suspended by the ATP Tour after the Shanghai Masters last October when he sped through a match against Mischa Zverev with little effort or apparent care whether he won or lost.
Kyrgios was fined more than $40,000 and suspended for eight weeks, a period that was later reduced to three when he agreed to consult with a sports psychologist. He said Wednesday he's still seeing the psychologist and that "it's going very well."
His on-court demeanor has divided public opinion. On Wednesday, he was mostly on his best behavior, except for some shouts to his courtside box.
There were some boos from the crowd at the end, and Kyrgios noticed.
"Obviously it's not the greatest thing to hear," he said. "I didn't have the best preparation coming into the Australian Open. Pretty banged-up, my body. But getting booed off, definitely not the best feeling."
Information from The Associated Press was used in this report.
Kyrgios crashes out of Australian Open
Nick Kyrgios blew a two-set advantage to fall 1-6, 6-7 (1-7), 6-4, 6-1, 10-8 to Italian Andreas Seppi after engaging in a running verbal battle with his courtside box.