Elizabeth Cambage was immense, collecting 29 points on 11-15 shooting and 11 rebounds but the Aussies were hampered by a 26-9 turnover count.
The shattering loss was made even more heart-breaking as it was Penny Taylor's final game in the green and gold, having announced her retirement from the international game prior to the start of the Olympics.
The two-time silver medallist struggled to find a rhythm throughout the contest after recording two early fouls but still finished with two points, nine assists and three steals while the signs for the future of Australian basketball are bright as Rachel Jarry (14 points, four assists) stepped up in her absence.
Her full-court passes helped set up Marianna Tolo (four points, seven rebounds, three blocks) and Cambage on several fast breaks while a string of three three-pointers in the first half helped Australia to a slim two-point lead at half-time.
Leilani Mitchell (ten points, three assists) then caught fire herself in the third period, reeling off eight straight points to give the Aussies their biggest lead of the game.
Serbia never surrendered though and played through an injury to Sonja Petrovic (13 points) while they broke down Australia's pick and roll defence as well as hitting some timely three-pointers courtesy of Jelena Milovanovic (17 points).
Foul trouble forced Cambage to sit most of the third quarter but the Aussies pulled themselves right back into the contest in the final term as the centre scored the first seven points for her team.
The lead then changed hands several times down the stretch before Ana Dabovic (24 points) sunk one of her two free throws inside the final ten seconds to put Serbia ahead by two.
Australia were able to get one final shot off but it was contested and rushed.
The full box score can be found here.
While the loss marks a sudden end to the women's campaign, the men will hit the court in their Semi-Final against Lithuania tomorrow at midnight AEST.
The full schedule for the men's finals can be found via the FIBA website here.