Belfast's 42-year-old Swail was 3-0 down when he decided he couldn't continue against Telford's Gunnell, who goes through to a third round match against Joe Jogia.
Swail, who got to the World Championship semis in 2000 and 2001 as well as the Welsh Open final in 2009, has plummeted to 65th in the world rankings and faces a fight to retain his professional status.
Belgian teenager Luca Brecel followed up his win over Andrew Pagett yesterday by beating Andy Hicks 5-3. Breaks of 77 and 70 helped put Brecel 3-0 ahead and he clinched victory in the eighth frame with a run of 43. He now meets Anthony Hamilton and needs two more wins to reach the final stages in Beijing.
There were mixed fortunes for the Chinese players in action as Liu Chuang beat Andrew Norman 5-2 but Liu Song lost 5-1 to Sam Craigie.
Stoke's Liam Highfield beat James Wattana 5-2 with a top break of 68 while David Grace saw off Barry Pinches 5-3 with two runs of 75 and one of 70.
