I think that it comes from boxing. If you get knocked out (unconscious) you loose the fight. Since then, it has been used more figuratively in any contest where you stop competing if you loose a match or game. Games that work like that are called 'knockout rounds'. e.g. the Football world cup starts with 'round robin' games, then progresses to knockout rounds.
'Arsenal got knocked out at the quarter final round'. 'He got knocked out of the club championship'.