Sir Ben Ainslie's team were beaten by Luna Rossa Prada Pirelli in races seven and eight of the PRADA Cup Final series, which produced the Italians' 7-1 series victory and secured their place in the 36th America's Cup match.
Luna Rossa will now duel against the defender, Emirates Team New Zealand, in the America's Cup Match. The action starts, live on Sky Sports, on March 6.
The America's Cup Match is a 13-race series and the first team to score seven points will clam the famous trophy.
Ahead of racing on Sunday, Matt Gotrel, one of INEOS TEAM UK's grinders, said that the British team were "excited at the prospect of going racing again" and that Saturday's race win had boosted belief slightly.
However, the conditions that presented themselves out on the water in Auckland were not favourable for them.
Since the start of the PRADA Cup, INEOS TEAM UK have been open about the fact that they preferred heavier wind conditions, and Ainslie addressed that again on Saturday evening.
"I think it seems to be that on 13 knots and above, the boats are pretty even, but beneath that, we struggle," he said
"They [Luna Rossa] know, and we know, that is the challenge."
With winds exactly in the wrong range for the British team, the challenge was a significant one from the word go. Course A was selected and race seven commenced with a north-easterly breeze of 10 to 12 knots.
After a positive pre-start for INEOS TEAM UK, a drop in breeze meant that the Italians were able to show their skills early and eat up the British team's lead.
Luna Rossa continued to work well in the light airs, something they would do all day, and they secured a 16-second lead at the first gate. The Italians kept on extending that advantage as the race progressed and by the last windward gate, they were one minute and 45 seconds ahead.
After executing a smooth finish, they moved 6-1 up and needed just one more victory to become the challenger to Emirates New Zealand.
"We're super happy, for sure we are very close, but we have to stay focused," Francesco Bruni, Luna Rossa's co-helmsman said on the water between races. "We definitely have the high mode."
In the second race of the day, Ainslie and Giles Scott performed a strong pre-start and gave their team the edge going over the line.
However, with the conditions still favouring the Italians, they were able to restore their hold on proceedings. After doing so, and with the confidence of a 6-1 cushion in their favour, Luna Rossa sailed a clean race.
Throughout the PRADA Cup Final series, the Italian team have been measured with their reaction to race victories, knowing there was more racing to come, but this time after their 56-second win, the roars could be heard and fist pumps seen.
After returning to the shore, Ainslie graciously praised his opponents before taking the opportunity to salute the entire team for their hard work and efforts.
There are only 11 sailors on board BRITANNIA at one time, but there is a team of over 100 individuals who have worked night and day during this campaign.
"My initial thoughts are congratulations to Luna Rossa. They sailed brilliantly, and they had the best package over the range of conditions and they deserved to win," he said.
"We're obviously disappointed. We fought tooth and nail and we went down fighting, even in that last race so I couldn't be prouder of the team.
"The way that they've dealt with the challenges that we've had over these last three or four years with this campaign, and when we look back to the World Series and turning things around after the Christmas race.
"Ultimately, we weren't quick enough across the range of conditions and that's where you need to be if you're going to win the America's Cup."
An America's Cup campaign doesn't just start the moment that the team lands in the host country. Instead, it takes years of design and development work to get to that stage.
When INEOS TEAM UK landed in Auckland, and were able to take to the water for the first time against their competitors in the PRADA World Series Auckland and PRADA Christmas Race, they struggled to match their rivals. In short, the racing has been a battle as Ainslie shared.
"It's been a tough campaign. It's actually been a tough campaign the whole way through for a number of different reasons.
"I guess dealing with a new class of boat and all of the challenges that brings, but while we've been here in New Zealand, it's been a bit of a roller-coaster ride," he added.
"Once again, I can't thank the team enough because they've just stuck to the task and every person in the organisation worked incredibly hard to turn this boat around and get us through into the PRADA Cup Final. You need a strong team and I'm really proud of them."
The immediate question for Ainslie, who not only skippered race boat BRITANNIA but is INEOS TEAM UK's principal, is whether or not he will be back for more.
From a young age, Britain's most successful Olympic sailor has held the America's Cup in the highest regard and his ambition to ensure that the Auld Mug finally returns to British shores remains as strong as ever.
"I started this team back in 2014 with the goal to get the Cup back to Britain and as far as I'm concerned, until I get the job done it's not over, so we've got to keep going," he said.
"There's a lot of learning out of these campaigns, as you can imagine. You look at Luna Rossa and Team New Zealand, they've been in the Cup game now for 20 and 30 years respectively.
"Whilst the people may change over the years, it's that learning and development that's the key. I think that we've got to keep on going and get the job done."
Watch every moment of the America's Cup challenge, live on Sky Sports. Coverage continues with the first race in the 36th America's Cup match on March 6.