India, however, managed to bounce back and scored two quick goals via Ramandeep Singh in the 24th and 26th minutes.
Both teams played an attacking style and there were several chances at either end.
Malaysia, banking on counterattacks, began the proceedings by forcing two successive penalty corners in the third minute.
With the win, Malaysia qualified for the World Cup.
Gonzalo Peillat's goal sandwiched in between two efforts from Maico Casella gave the South American side a commanding lead, with Shan Ali's 49th minute strike proving to be little more than a consolation.
Ramandeep's sense of positioning saw him scoring India's first goal.
Malaysia will face reigning Olympic champions and world number one Argentina in Saturday's semifinal. Argentina defeated Pakistan in the first quarterfinal.
JOLTED by a loss to the Netherlands, India would look to regrouping quickly when they take on Malaysia in the quarter-final of the Hockey World League Semi-Finals, here on Thursday.
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The numbers bounce up and down throughout the year, with the percentage of non-hydroelectric renewables in 2016 ending up at 7%. That will help drive renewable penetration by 2040 to 74% in Germany, 38% in the USA , 55% in China and 49% in India.
Though India are ranked higher, Chief Coach Roelant Oltmans's men must guard themselves against complacency when they square off with Malaysia who can be a "tricky opponent".
Tajuddin doubled Malaysia's lead in the very next minute when he fired home from another penalty corner.
Both Pool A matches were draws as China and Scotland could not be separated at 1-1, while South Korea's clash with Italy ended goalless.
The Malaysian team made their Indian opponents pay for a series of uncharacteristic errors on their way to a shock win at the Lee Valley Hockey and Tennis Centre on the Queen Elizabeth Olympic Park.
India conceded seven penalty corners, three of which were converted by Malaysia - Razie Rahim (19th, 48th minutes) and Tengku Tajuddin.
Malaysia continued their attacking game and got a great opportunity to break the deadlock in the 17h minute when a scoop from the deep found Nabil Noor alone inside the Indian circle but alert goalkeeper Vikas Dahiya came off his line to deny Noor.
The early exchanges on Saturday could determine the fate of the game, especially considering how India ceded advantage to Malaysia inside the first 20 minutes of their quarterfinal.