Wales had looked set to give themselves hope of reaching Brazil when Gareth Bale put them ahead from the spot. But Dejan Lovren's fierce strike and Eduardo's smart finish inside the final 15 minutes condemned Coleman's side to a loss which leaves them 10 points adrift of Group A pacesetters Belgium and Croatia, with just 12 points left available.
After a bright first half, Wales were ultimately made to pay for their inability to retain possession after the break, and Coleman admitted his side had been guilty of defending too deep. He said: "We are gutted, even though we knew before the game we would be up against a very good team."
Coleman added: "We felt we could have come in 2-0 up, but we could not get that elusive second goal.
"We then probably defended too deep, too early in the second half because it is human nature to protect your lead against such a good team.
"Boaz Myhill made some great saves and we thought it might be our night, but you don't expect a centre-half to score a goal like that.
"It was soul destroying for us. We looked tired and then they got the winner late on when we had probably earned a draw. We needed the three points if we were going to do anything in the group and give us an outside chance really. We are not going to qualify now."
When Wales were a goal to the good, Bale spurned two great chances to extend their lead.
The second of those opportunities saw the Tottenham player spoon over the bar when clean through, and Coleman could not believe the red-hot winger did not found the net again.
He said: "As soon as he got a sublime first chance I thought he was going to score, I think the ball bobbled a bit but you would have put money on him scoring and unfortunately he didn't. If it had gone in I may have been sitting here with a different expression on my face."
Source: PA
Source: PA