It was the first time that the world No 1 had lost since going down to another Belgian player Kim Clijsters in the final of the WTA Tour Championships in Los Angeles in November.
She had won 21 straight times this year lifting titles at the Australian Open, Paris and Key Biscayne and there had been talk that she could go though the year unbeaten
Serena already holds all four of the Grand Slam titles - Australian, French, Wimbledon and US.
Earlier, Serena held off third seed Lindsay Davenport of the United States 6-1, 7-5, in the semi-finals.
Henin-Hardenne routed American wild card Ashley Harkleroad 6-2, 6-1 to advance to her second championship match of the year.
Serena improved to 21-0 on the WTA Tour this year and is unbeaten in 24 total matches in 2003. After helping the United States win the Hopman Cup to start the season, she captured her fourth straight Grand Slam crown at the Australian Open and added titles in Paris and Miami.
The 21-year-old Serena totally dominated in taking the opening set in just 23 minutes.
Serena started the second set off exactly as she did in the first, painting the lines with winners off both wings and blasting huge serves.
Trailing 1-3 in the second set, Davenport got back on track by holding serve and breaking Williams for the first time to tie it.
The players remained on serve and Davenport went ahead 5-4 before Serena returned to top form. Assisted by strong serving, she won the last three games to defeat Davenport for the ninth time in 11 meetings.
Results (prefix number denotes seeding):
Semifinal: 1-Serena Williams (U.S.) beat Lindsey Davenport (U.S.) 6-1 7-5; 2-Justine Henin-Hardenne (Belgium) beat Ashley Harkleroad (U.S.) 6-2 6-1.
ESTORIL: Russia’s Nikolay Davydenko picked up his second title of the year when he slugged his way past Agustin Calleri of Argentina 6-4 6-3 to capture the Estoril Open on Sunday.
The 21-year-old Davydenko, who won his first ATP crown in Adelaide in January, humbled Calleri with his superior baseline tactics in an hour and 17 minutes.
Defending champion Magui Serna swept past unseeded German Julia Schruff 6-4 6-1 in little over an hour to take the women’s title.
The second-seeded Spaniard was initially troubled by the blustery conditions but she eventually ran away with the contest as the inexperienced Schruff, who was playing in her first WTA final, seemed to be overcome with nerves.
“I was expecting a more difficult match. But no matter how easy it was, I’m very happy to have won,” said a jubilant Serna, who did not drop a set during the tournament.
“I knew it was her first final and that she might be nervous. I tried to just stay calm and not let anything bother me.”
Results (final):
Women: 2-Magui Serna (Spain) beat Julia Schruff (Germany) 6-4 6-1
Men: Nikolay Davydenko (Russia) beat Agustin Calleri (Argentina) 6-4 6-3—Reuters/AFP