Captain Charlotte Edwards blamed a "lack of discipline" for in the Women's World Twenty20 final.
Set 143 to win in Colombo, England fell short on 138-9 despite a late rally against the defending champions.
"Australia were better than us today," Edwards told BBC Sport. "Our lack of discipline up front really cost us.
"We were under par with the ball and paid for it. The first six overs of their innings was the difference."
Meg Lanning and Alyssa Healy shared an opening stand of 51 of 6.5 overs, and Jess Cameron hit 45 off 34 balls to help Australia to 142-4.
Edwards top-scored for England with 28, but no other batter reached 20 as the 2009 champions slipped to only their second defeat in 26 Twenty20 internationals.
Jess Jonassen finished with 3-25, while the economical Lisa Sthalekar and Julie Hunter claimed two wickets piece.
Edwards said she had no regrets about her decision to bowl first.
"I would do it every single time," she said. "It wasn't the reason why we lost the game. The reason we lost the game was lack of discipline with the ball. We even felt we could chase it down.
"It was a good pitch out there, a lot better than the semi-final pitch and we just lost wickets in clusters."
England struggled after the skipper departed, with world number one batter Sarah Taylor, who had made an unbeaten 65 in the win over Australia in the group stage, edging Ellyse Perry behind for 19.
"Sarah's job is to bat through a little bit more but when you chase, you always have an eye on the run rate," added Edwards.
"We knew where we needed to be, but it's a final. I guess the pressure did tell in the end."
Edwards was named player of the tournament for her tally of 172 runs in five matches, but said the award was little consolation for her team's defeat.
"I'd much rather be lifting the other cup," she said.
"The youngsters in the team keep me young so I keep trying to get better."
Australia captain Jodie Fields said: "England played a really good match but we had the belief in our team. (It was) just an all-round performance.
"It's awesome to be standing here as winners. It's a good feeling. All the hard work has been worth it."