The game among under-23 squads was a winner-take-all battle for a berth at the Summer Olympics.
"The dreams of our team and the dreams of our players of going to the Olympics are now something in the past," said U.S. coach Glenn Myernick. "I'm sure it will hurt even more tomorrow than it does right now."
Rafael Marquez Lugo scored twice, and Diego Martinez and Ismael Iniguez once each to lead Mexico.
In other news:
* Defender Heather Mitts and forwards Mia Hamm and Cindy Parlow were among 20 players picked for the U.S. roster for Olympic soccer qualifying, which begins later this month.
U.S. coach April Heinrichs did not choose defender Brandi Chastain, who is recovering from a foot injury.
Other U.S. players selected were goalkeepers Briana Scurry and Siri Mullinix, defenders Joy Fawcett, Kate Markgraf, Amy LePeilbet, Christie Rampone, and Cat Reddick, midfielders Shannon Boxx, Julie Foudy, Angela Hucles, Kristine Lilly, Leslie Osborne, Lindsay Tarpley, Aly Wagner, and forwards Shannon MacMillan, Heather O'Reilly, and Abby Wambach.
* Parts of English soccer could be "institutionally racist," according to an independent report released that set a 3-year target to recruit more blacks and Asians for the game. *