Sebastien Grosjean also bowed out of the battle for the eighth and last spot in the Houston event after Tim Henman gained revenge for his Wimbledon quarter-final defeat by beating the Frenchman 3-6, 6-4, 7-5.
Argentina's David Nalbandian is now almost certain to fill the last place despite starting the day by withdrawing from his match against Jonas Bjorkman with a wrist injury.
The only player who can deny Nalbandian now is Thailand's Paradorn Srichaphan. He must win the tournament to do so.
Nursing a bad back, third seed Roger Federer eased into the last 16 by beating Thierry Ascione 7-6, 6-1. Another French qualifier, Gregory Carraz, upset 11th seed Sjeng Schalken.
Brazilian Kuerten, a three times French Open champion, won a classic battle between beef and artistry in the final match on centre court.
Philippoussis, the ninth seed, served 31 aces during the match but he will rue a double fault when he had his first match point in the second set tiebreak. He wasted four more in that tiebreak before Kuerten snatched it 13-11.
The third set progressed inexorably to another shootout, which the Australian began with another double fault. Suddenly his shoulders dropped and Kuerten romped away to win it 7-1. He now plays Henman.
THREE-WAY TUSSLE
Wimbledon champion Federer, in a three-way tussle with world number one Juan Carlos Ferrero and Andy Roddick to finish top of the end-year rankings, spent the first set against Ascione testing out his back which he injured during the Swiss Indoors last week.
But once he realised it would give him few problems, the Swiss took control of the second set.
"I didn't practice for four days and I wasn't sure I was going to make it. I couldn't force it too much today... I kept the points short and didn't use up too much energy," he said.
"Everything went better in the second set and I can play full out for the rest of the tournament." Federer plays Dutchman Martin Verkerk in the last 16.
Carraz, the last Frenchman in the draw, believes he is on a roll after his 6-4, 2-6, 6-3 defeat of Schalken, another Dutchman.
He plays unseeded Bjorkman in the third round after the Swede beat Nalbandian's replacement, Nicolas Lapentti, 6-4, 6-1.
"I don't feel I am living anything extraordinary, I feel I am in my rightful place," said Carraz, 28, who missed several years on the tour due to injury and doubts about his ability.
"Now I'm looking ahead and I'm trying not to make the same mistakes. I don't regret what happened, I just wasn't ready."
Two of the most improved players of 2003, Rainer Schuettler and Guillermo Coria, joined Federer in the last 16.
Fifth seed Schuettler muddled past American James Blake 4-6, 6-2, 6-3.
MEDIOCRE QUALITY
In a match of mediocre quality, there were 12 breaks of service. "That match was not good enough to write a book about," Schuettler said.
Argentina's Coria, fresh from winning the Swiss title last weekend, beat Spain's Feliciano Lopez 6-3, 3-6, 6-3. But he is suffering from a fever and is not certain to play Romania's Andrei Pavel in the next round.
Grosjean, seeded seventh, and Henman played full-on serve and volley tennis to thrill the centre court crowd. Grosjean dominated the first set but, disturbed by two close line calls, handed the initiative to the Briton in the second.
Henman switched to percentage tennis in the third set, allowing Grosjean to make the mistakes and made the vital break in the final game of the match.
Grosjean was so disgusted he dumped all his rackets in the locker room dustbin and left immediately on holiday.
