The Baggies boss named an under-strength side for the third round tie and was made to pay as Crystal Palace progressed with the home team spurning a number of chances throughout.
The Baggies' caretaker manager made eight changes from his side's 1-0 victory over Newcastle United on New Year's Day, and the under-strength home team struggled to break the Eagles down despite having the better chances in the second half.
Dwight Gayle put the visiting team ahead midway through the first half at the Hawthorns before substitute Marouane Chamakh sealed Palace's progress in stoppage time, and Downing expressed his disappointment at exiting the cup so early on.
"It's a competition we wanted to progress in and today was disappointing," he told reporters. "We were a little short of how we have been in the last four games. We conceded a poor goal. Tony Pulis' sides are always difficult to break down and giving them a goal meant that our task was doubly tough.
"We kept going but without creating too much. Credit to Palace, they were resolute in their defending."