With LaLiga leaders Barcelona having drawn on Saturday, Atleti knew that a victory would have taken them to within three points of Ernesto Valverde's side.
But Atleti failed to make Barca pay for their slip up, and having been denied by a spectacular stop from Jan Oblak early on, Betis struck when Canales slotted home from 12 yards out in the 65th minute following Filipe Luis' handball.
Diego Simeone will likely point to debutant Alvaro Morata having had what looked to be a clear penalty claim turned down earlier in the second half, while Antoine Griezmann hit the woodwork, but that was the most Atleti could muster as they suffered their first LaLiga defeat since September.
Atleti had Oblak to thank three minutes in, their goalkeeper lunging to his right to sensationally keep out Zouhair Feddal's header.
Oblak's save proved the highlight of a sluggish first half, but Atleti came out with renewed vigour after the interval, and were adamant they should have had a penalty in the 55th minute.
Morata drew an awkward sliding challenge from Feddal in the box, only for the referee to award a corner, with VAR not used to review the incident despite Atleti's protestations.
Atleti's luck got worse 10 minutes later – substitute Filipe Luis handling in the area, with Canales making no mistake despite Oblak diving the right way.
Griezmann curled a sublime strike onto the frame of the goal moments later, but Betis held firm to inflict a damaging blow to Atleti's title challenge.
What does it mean? Atleti's run ends
Simeone's side had gone a remarkable 18 league games without a defeat before Sunday's trip to Seville, but now have to lift themselves ahead of a derby clash with Real Madrid next time out, and they head into that fixture still six points behind Barca.
Betis, meanwhile, are up into sixth place, and may still harbour hopes of Champions League qualification.
On the rare occasions teams do breach Atleti's defence, they then have one of the world's best goalkeepers to beat, and Oblak proved his credentials once again with that stunning early stop. Unfortunately for Atleti, Canales – who with six goals this term now has his best return since the 2009-10 campaign – kept his composure from the spot.
Much-maligned Morata fails to spark
The hope is that Morata will be revitalised by his move back to the Spanish capital, but based on Sunday's evidence, the striker has a long way to go to recapture the form of his Real days. He looked devoid of confidence for much of his debut, though was unfortunate not to be awarded a penalty on the occasion he did get behind Betis' lines.