Ding was cruising at 3-0 up, but lost the next four frames against world number 28 Woollaston - a reversal of fortune from last year's final when he recovered from 3-0 down to beat Neil Robertson 4-3. The Chinese ace now has just two ranking events left to attempt to match Stephen Hendry's record of five titles in a season.
Breaks of 68 and 65 helped Ding win the first three frames, but he made a host of unexpected errors in the remainder of the match. A run of 68 from Woollaston ignited the fight back, and after getting back to 3-3, he dominated the decider, winning it 78-7.
"Ding was so good in the first three frames, I seemed to be snookered or in a lot of trouble every time I came to the table," said Woollaston, who got to the quarter-finals of this event last year.
"Once I got back to 3-1 I sensed he started to miss a couple. I always seem to play well on the TV tables against the top players like Ronnie or Ding. I just wish I could play as well in the qualifiers.
"It's a big win but it will only be good for me if I go further now, so I need to back it up in my next match. If I can do well here it would be a massive boost ahead of the World Championship."
Anthony Hamilton came through an epic battle with Sam Baird, winning 4-3 after 3 hours 33 minutes. Hamilton took the 54-minute decider 86-39.
John Higgins came from 2-1 down to beat Jimmy Robertson 4-2. "It was a tough game to get through, I was delighted to win that last frame when it looked like it was going to be 3-3," said Higgins.
"I played some pretty good stuff at the World Open so I came here feeling better with my game. I can feel it's coming back and maybe I can get a run here. I'm feeling a lot better about the World Championship this year."
Mark Williams saw off Lyu Haotian 4-1, making two breaks of 65 and one of 60.
Ball by ball scoring and results from tournaments