Valverde's withdrawal at half time of the European affair was a big talking point, with Eduardo Camavinga being introduced, while Brahim Diaz was also brought on for Aurelien Tchouameni at the break.
Milan recorded a shock 3-1 victory at Bernabeu, with ex-Real Madrid striker Alvaro Morata among those on the scoresheet, as Los Blancos suffered a second straight defeat following their 4-0 reverse to Barcelona in El Clasico.
Ancelotti has said that a back issue forced him to replace Valverde, with the Uruguay international now seemingly a doubt for Real Madrid's final game ahead of the November international break against Osasuna this weekend.
"Fede wasn't giving his 100%, he had a back problem but he trained well yesterday... but I think he had problems in the first half," said the manager in his post-match press conference.
Ancelotti: 'Valverde was struggling with a back problem'
Ancelotti also admitted his concern at Real Madrid's performance levels this season, with the reigning Spanish and European champions finding it difficult to find their rhythm in the early stages of the campaign.
"We have to be worried. The reality is what we see on the pitch is that we are missing something and we have to fix it," he continued.
"The team has not been giving a good version in the last few games. We have conceded nine goals in three games and that is too much for a team that has built its strength on defensive solidity. It is normal that the players are down, as I am. It is going to be a very long night and it is good that it is that way.
"We have to focus on what we have today, which is a team that is not playing its best, and fight again for all competitions. Today we had many opportunities in attack, but we lacked accuracy. Because in my opinion, we could have scored many more.
"What is obvious here is the ease with which the opponent reaches us. That is the worrying thing, it is the main problem that we must solve.
"No [we do not lack motivation], we have to accept criticism and face reality. We want to do better because it's very difficult to get to the end of the season like this. We have to defend better and we have to find solutions, without going crazy trying to change."
Vazquez: "Our rivals are punishing us"
Real Madrid defender Lucas Vazquez, meanwhile, admitted after the match that his side are 'being punished', but he is expecting a strong response from the capital giants.
"Our rivals are punishing us quite a bit. It's a very bad night, defending and attacking is a collective thing. This is a long one and Madrid will fight until the end. The Bernabeu crowd is supreme. We have to work hard and turn this around," he told reporters.
Real Madrid are currently second in the La Liga table, nine points behind the leaders Barcelona, who have played a game more, while Ancelotti's side are 17th in the Champions League table, boasting six points from four matches.