Enhanced Coulomb interactions in monolayer transition metal dichalcogenides cause tightly bound electron-hole pairs (excitons) that dominate their linear and nonlinear optical response. The latter includes bleaching, energy renormalizations, and higher-order Coulomb correlation effects like biexcitons and excitation-induced dephasing. While the first three are extensively studied, no theoretical footing for excitation-induced dephasing in exciton-dominated semiconductors is available so far. In this Letter, we present microscopic calculations based on excitonic Heisenberg equations of motion and identify the coupling of optically pumped excitons to exciton-exciton scattering continua as the leading mechanism responsible for an optical-power-dependent linewidth broadening (excitation-induced dephasing) and sideband formation. Performing time-, momentum-, and energy-resolved simulations, we quantitatively evaluate the exciton-induced dephasing for the most common monolayer transition metal dichalcogenides and find an excellent agreement with recent experiments.