The defending champions went two goals behind to the Red Warriors and could not find a way back despite Faris Ramli's strike late on in the second half
With just four games left to go, it is mathematically impossible for the Singapore side to catch leaders Selangor FA, who beat Terengganu FA 4-1 on the night.
Fandi Ahmad was without key players Khairul Amri, Safuwan Baharudin, Shakir Hamzah and Zulfahmi Arifin as they resumed MSL action after a two-week break and it forced the LionsXII coach to adopt a more conservative approach.
That played into the Red Warriors' hands, who were constantly on the prowl from the get go as they pinned the Lions within their half, with Brendan Gan and Wan Zaharulnizam Zakaria the chief architects in their attacks.
Kelantan's dominance was rewarded on the half-hour when Fakri Saarani neatly back-flicked a cut-back from Wan Zaharulnizam in at the near post, after the latter had brilliantly shimmied past Faritz Hameed.
Baihakki Khaizan had to put in a superb challenge to deny Fakri after the forward was sent clear by Gan, while Sufian Anuar's snapshot was the only real effort the LionsXII could muster before the break.
The Red Warriors did not let up after the restart and doubled their lead on the hour mark through Khairul Izuan. It was Gan who split the defence open again, providing the pass for the striker to run on to. The initial shot was blocked by goalkeeper Izwan Mahbud, but the rebound came off the covering Madhu Mohana and landed for Khairul to nod home.
Faris Ramli pulled one back on 68 minutes after he skillfully slid the ball past Kelantan goalkeeper Khairul Fahmi Che Mat from a tight angle, giving the LionsXII a glimmer of hope.
The LionsXII’s spirits were visibly lifted following the unexpected goal and they played their best football of the night in the remaining period, but an equaliser eluded them.
The team will next host Sawarak on Saturday at the Jalan Besar Stadium, where they will hope to get back to winning ways.