The U.S. women's national team needed a win or draw to finish first in Group C but lost to Sweden for the second time in 2011.
But a quick start from a disciplined Swedish squad ruined the top-ranked team's original plan.
Sweden jumped on the Americans with two first-half goals and the U.S. women's national team was unable to fully recover as it dropped a surprising 2-1 decision in the third and final Group C game of the Women's World Cup in Wolfsburg.
"We think the road to the World Cup's top podium is going to be difficult," U.S. forward Abby Wambach said. "That's kind of been our journey so far, so why change things now?"
Midfielder Lisa Dahlqvist opened the scoring and striker Nilla Fischer added to the tally to help Sweden win the group and move on to face Australia. Wambach scored the only goal for the United States, which finished second and will face Brazil in the quarterfinals.
"I'm happy with the way we created chances. I'm disappointed that we didn't win," said U.S. coach Pia Sundhage.
The Americans lost for the first time in 17 group games during their Women's World Cup history. It was also their second defeat to Sweden in 2011 after falling to the European nation which ranks fifth in the world 2-1 at the Four Nations Tournament in China on Jan. 21.
Dahlqvist shocked the U.S. just 16 minutes into the game with a penalty kick after being taken down in the box by Amy LePeilbet, who received a yellow card on the play. Dahlqvist snuck the ball past U.S. goalkeeper Hope Solo to the lower left of the net.
Sweden's next goal came 19 minutes later off a Fischer free kick from about 25 yards out. The ball took an unluckly deflection off Amy LePeilbet in the wall and wrongfooted Solo, resulting in the U.S. entering the half down 2-0.
"It was very unfortunate," Solo said. "I felt like I didn't have a chance to make a play on them, and that's frustrating."
The U.S. had never finished with a win or draw after being down two goals in a World Cup match and wasn't able to break that streak despite showing some life in the second half.
Wambach broke her scoring drought during the tournament when she knocked in a corner kick with her shoulder in the 67th minute. It was the veteran's first World Cup goal this year and 10th overall.
Kelley O'Hara nearly scored the equalizer in the closing minutes but missed from point-blank range off a pass from Lauren Cheney.
The U.S. will now head back to Dresden to play Brazil, which features five-time world player of the year Marta. The Americans are 23-2-2 against the Brazilians, but lost to the South American squad 4-0 in the semifinals of the 2007 Women's World Cup.
"Even though we lost, we can come out as a winner if we take a different path," Sundhage said. "We really want to play in the final. But we have to play some great games, play some great teams. I really want us to embrace this process. I think the team will get stronger. That's the plan."