The British No 2 was hampered by the injury - which he originally suffered in his match-winning Davis Cup display against the Ukraine in Kiev last weekend - in his 7-6, 6-7, 6-4 defeat.
"I tried my best, but it was not good enough," said the 13th seed, who has been told to rest for 10 days. "I was going to enter the Newcastle Challenger next week, but I'll have to pull out. It's a shame to miss a home event, but there is nothing left to do."
Rusedski hopes to be fit for the north American hard-court season, which begins for him in two weeks with the Mercedes Super Nine event at Cincinnati. Rusedski admitted that his movement against Larsson was restricted by his injury.
"I couldn't get to some shots that I wanted on my forehand. But I'm confident on the clay now. I know I can play against anyone out there. I had my chances to win.
"I've only played three events on clay this year and have lost to some pretty good guys - Albert Portas, Magnus Norman in Paris and now Magnus Larsson."
Thomas Muster, once invincible on the surface, is now losing on it on a regular basis and the former world No 1 followed Rusedski out after a 6-4, 7-5 defeat by Portas, a Spaniard ranked 52nd in the world.
Boris Becker managed to scrape through, beating the Moroccan Karim Alami 7-6, 7-6. With his retirement looming, the 29-year-old confirmed that he will play at the US Open, in Germany's Davis Cup relegation round in September and the Grand Slam Cup in Munich at the end of the year.