Price was ahead on the scorecards when he rocked his former sparring partner with a big right hand in the fifth round on the previously undefeated Ali.
Both men ended up grappling and as the pair fell to the canvas, Ali landed on top of the Liverpool fighter and subsequently bit him under the ribs, while wearing a gum shield.
After Price showed referee Mark Lyson the bite mark, Ali – docked a point in the third round after previously being warned for punching to the back of the head – was disqualified.
The result saw the Birmingham fighter suffer a first defeat after 17 contests, and also had his purse withheld.
As he left the ring, several drinks were thrown from the crowd.
Price admitted his win over Ali was far from satisfactory but will now look to press on and rebuild his career after a series of recent setbacks.
Speaking in the ring, the fight broadcast on Sky Sports, Price was asked about a rematch, but he said: “I don’t want to share a ring with an animal like that again.”
Former world cruiserweight champion Tony Bellew branded Ali “a disgrace” and called for him to be banned.
The British Boxing Board of Control are set to investigate the incident during the non-title fight at the M&S Bank Arena on Saturday night.