A late header from Spanish captain Mikel Oyarzabal saw the Olyroos suffer a narrow 1-0 defeat in Sapporo on Sunday night.
The 80th-minute strike split the two sides in a match that where Australia's defence delivered a resolute showing against some of world football's premier young talent.
72 hours on from their historic victory over Argentina, Graham Arnold's side started brightly and took the game to their European opposition in the opening stages.
However La Roja began to stamp their quality upon the contest, dominating possession and heaping pressure on the Olyroos' stubborn backline.
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Australia was within ten minutes of coming away with a point when Oyarzabal popped up with the decisive goal - glancing home a cross from Real Madrid maestro Marco Asensio.
The result leaves the Olyroos in second place of Group C, with a win or draw against Egypt in Wednesday's final group stage encounter enough to secure passage to the Quarter Finals.