A solitary strike from former City midfielder Caroline Weir was enough to see Las Blancas progress to the final round of qualifying at the Estadio Alfredo Di Stefano.
It could have been a different story on another day with Gareth Taylor’s side on top for most of the second half, but it was to no avail.
But while the City boss didn’t shy away from the disappointment of an early European exit, he insisted that our focus hasn’t been affected too drastically by the defeat.
“Of course, there was always going to be one team suffering, it’s a shame these two teams met at this part of the competition,” Taylor reflected.
“It was a decent level game, but we were fully aware of the rules.
“We knew they’d have a decent crowd behind them and it’d be a tough game, no doubt it was.
“(But) It doesn’t mean anything for the rest of our season. It’s a big disappointment, we won’t hide from that, but we knew the implications that it would potentially be City v Madrid.
“There would always be a loss for someone, but there is no change for us. The objectives switch slightly, but it’s the same in terms of what we want to achieve.”
Taylor also admitted he was frustrated to face an opponent of the hosts' calibre so early in the competition.
Six members of the City squad who featured in Madrid helped England to Euro 2022 glory this summer, with the final coming just three weeks before Sunday evening’s showdown with Las Blancas.
And while the boss insisted he wasn't looking for excuses, he explained that the quick turnaround had limited further opportunities for his side to gel.
He said: “Having more time with the players, especially the integration of new ones and existing ones being more familiar.
“You just need time and unfortunately in this format you don’t get any at all especially with the Euros.
“The Lionesses went all the way which limited match exposure and cohesion. It’s the same for both teams though.
“It’s very early in the season to play this calibre of game.
“It’s the second season in a row that it’s happened, so we need to win the league and go straight into the group stage. That’s what we’re looking to do for sure.”