They entered this year's edition as one of the favourites but the legendary Megan Rapinoe won't be able to get her hands on the trophy again.
The USA drew 0-0 in normal time against Sweden before the European side won 5-4 on penalties.
A series of misses built up a tense sudden death that neither side seemed to take advantage of.
However, Lina Hurtig's penalty proved to be decisive - her spot-kick had narrowly gone over the line after initially being saved by Alyssa Naeher and the referee awarded a goal after an agonising check.
Sweden's players were jubilant in celebration after such drama and will now progress to the quarter-finals.
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The USA's defeat though has also seen the iconic two-time winner Rapinoe play her final ever World Cup game.
She announced before the tournament that she will retire at the end of the 2023 National Women's Soccer League, which concludes in November.
Rapinoe was substituted on for fellow legend Alex Morgan in the first half of extra-time for her final minutes at the tournament.
She was visibly emotional after their fate was decided, as well as her teammates, with the 38-year-old missing her penalty.
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It was the first time since 2011 when they also lost via a shootout to Japan that the USA had to play in extra-time at the World Cup, with this year being their earliest ever exit from the tournament.
Despite their undoubted quality, they were unable to keep their title defence going and will now be heading home, albeit due to mere millimetres.
Sweden goalkeeper Zecira Musovic, who stars for Chelsea, made a series of great saves throughout the match to keep her side in it.
Her efforts and those of her teammates will now see them face Japan in the last-eight on Friday morning.
It means for the first time since 2011, there will be a new tournament winner after the USA secured back-to-back titles in 2015 and 2019.