It was only the second time the Croat has managed to find a way past the Scot.
The world No.6 was broken on his very first service game and never really looked comfortable thereafter as Cilic eased to a 6-3, 6-4 win in 71 minutes.
The Scot's disappointing night was summed up when leading 40-0 and on the brink of a crucial break-back in the second set, as he allowed Cilic back to deuce before the Croat held for a vital 4-2 lead.
Wimbledon champion Murray was seeded second in Rotterdam but never lived up to that billing in an off-colour performance. Behind from the start after he was broken immediately at the beginning of the first set, Murray could not find the form which helped Great Britain claim a historic win over the United States in the Davis Cup earlier this month.
There were signs that Murray, who only recently returned to action following a back injury, was off his game when he was taken to three sets by the Austrian qualifier Dominic Thiem in the previous round. And against superior opposition in the shape of Cilic, he was duly punished.
Having lost the first set, Murray threw in a double fault which summed up the way he was playing. He let his frustration at his poor form get the better of him, angrily berating himself on court.
There was worse to come when, having been broken to go 3-2 down, he forged a great chance to get back into the match. He took Cilic to 0-30 on the Croat's serve, then was gifted three break points when his opponent dumped what should have been an easy winner into the net. But Murray could not take advantage as Cilic stormed back to take the game, effectively ending Murray's resistance.
Cilic taskes on Igor Sijsling for a place in the final after the Dutchman ousted the German Philipp Kohlschreiber 6-2, 2-6, 6-1.
Ernests Gulbis of Latvia defeated the top seed Juan Martin Del Potro 6-3 6-4. The Argentine was troubled by a wrist problem during his straight-sets victory over Paul-Henri Mathieu in Thursday's second round match, and Gulbis proved too strong for the defending champion.
Back-to-back aces sealed the first set for Gulbis, before Del Potro took a medical time out for his problematic left wrist. Gulbis earned an early break of serve in the second. The Latvian sealed victory and a place in the final four with a backhand volley.
Gulbis will now face Tomas Berdych of the Czech Republic after the third seed came from a set down to defeat Jerzy Janowicz 6-7(9) 6-2 6-4. The Pole took an erratic first set on a tie-breaker but soon crumbled as his service game suffered; the world No.20 recorded 39 unforced errors, allowing Berdych the chance to capitalise.