A topsy-turvy clash saw Barty ease through the first set and serve for the match in the second only for Kvitova to win three straight games to take it to a decider.
It was the Czech who served twice for the match at 5-4 and 6-5 before eventually winning a tie-break to take the contest 1-6 7-5 7-6 (3).
Halep stunned by Barty in Sydney second round
The result was tough on Barty, who was beaten by Angelique Kerber in the final 12 months ago, and both women must now recover for their Australian Open openers on Monday.
At the Hobart International, young American Sofia Kenin continued her rise with a dominant 6-3 6-0 victory over Anna Karolina Schmiedlova to win her first WTA Tour title.
The 20-year-old will break into the top 40 on Monday, and she said: “It feels amazing, I’m really happy to have won. I didn’t want to overthink it and I’m happy with the way I composed myself during the match.”
Kerber swats aside Giorgi to reach Sydney quarter-finals
Muguruza withdraws from Sydney event