Laugher, a 3m synchronised springboard gold medallist alongside Chris Mears in 2016, was seeking to add to his four Olympic medals, having qualified with the third-best score.
Afterwards, he suggested he could soon retire.
“Four Olympic medals – it’s hard to be sad, but right now in this moment I am obviously devastated,” Laugher said.
“I’m glad there’s no underwater microphones ’cause I said some horrible things under there.
“I’ve got to pass the baton on at some point. I’m getting towards 30.”
Ahead of the Britons and Olvera, defending champion Xie and world champion Wang continued China’s dominance of the diving in Paris.
Chinese divers have won all six golds on offer so far in diving. There are two events – Friday’s women’s 3m springboard and the men’s 10m platform on Saturday – to come.
Xie, 28, was a surprise winner, having taken a two-year break, completed a Masters degree and turned to coaching since winning the title in Tokyo.
In his absence, Tokyo silver medallist Wang had won the past three world titles.
China will again be strong favourites for gold in Friday’s women’s final, which begins at 14:00 BST, but Great Britain again have two entrants after Yasmin Harper and Grace Reid came through the semi-finals.
Noah Williams, a 10m platform synchronised silver medallist with Tom Daley, begins his individual campaign on Friday morning in the preliminary rounds from 09:00 BST.