Brian Flynn's side performed creditably for most of a pulsating contest at Basle's St Jakob Park but a Gokhan Inler penalty and Valentin Stocker's second finished them off in the final eight minutes.
Gareth Bale was a constant threat to the Swiss and cancelled out an early Stocker goal after 13 minutes - but the hosts soon reclaimed a lead they did not surrender through Marco Streller.
It made for a miserable 55th birthday for Flynn who, in his second and final match as caretaker manager, was hoping to prove his suitability for the job full time.
He now faces an anxious wait while Wales, whose qualification hopes were already in tatters, must now accept their long wait to reach a major tournament goes on.
For much of the game they had threatened to at least get themselves up and running in the campaign after losses to Montenegro and Bulgaria.
They attacked at every opportunity and in Bale had a man that worried the Swiss, but defensive mistakes proved their undoing.
They had a moment of alarm inside the opening minute but Stocker scuffed a shot and the visitors cleared.
They responded with an attack of their own as Bale surged down the left but Andy King stabbed wide.
Switzerland suffered a blow after eight minutes as goalkeeper Diego Benaglio, returning after missing Friday's loss to Montenegro through injury, was forced off.
Marco Wolfli took his place and had been on the field just a matter of seconds when the Swiss launched an attack that led to their opening goal.
Wayne Hennessey did well to beat out a fierce drive from Tranquillo Barnetta but Streller nodded across the six-yard box for Stocker to head home.
Welsh heads did not drop and they produced the perfect reply five minutes later as the lively Andrew Crofts won a 50-50 ball and sent Bale racing through on goal.
The Tottenham star showed a cool head to lift the ball over the advancing Wolfli for Wales' first goal of the competition.
James Collins went close to adding a second when he met a Bale corner with a powerful header but Wolfli saved.
Wales were exposed again after 21 minutes as Blake missed a chance to clear and Inler clipped the ball into the box. Streller made no mistake as he flicked the ball past Hennessey with his left foot.
Simon Church looked lively for Wales and shot over from the edge of the area after a good run and then saw another attempt forced narrowly wide.
Wales' bold approach continued to leave them vulnerable at the back and they were almost caught on the half-hour when captain Ashley Williams missed a header and Streller raced through.
The Basle forward, playing in front of his home fans, charged into the area but cut back onto his left foot and Williams recovered to block. Switzerland clearly recognised Bale as the Wales dangerman and both Stephan Lichtsteiner and Barnetta were booked for crude challenges on the left winger.
Bale also required treatment for a facial injury before the break but soon rejoined the action.
Wales had the first chance of the second half as Darcy Blake crossed for King but the Leicester man headed over.
Despite that positive contribution, Blake had endured some difficult moments on his international debut and was caught out as Stocker raced into the box to meet a cross with a bullet header.
Hennessey made a brilliant save but Flynn took action moments later as Blake was replaced by Christian Ribeiro.
Bristol City defender Ribeiro was soon into the action, heading away another dangerous cross to set up a Bale charge but the break amounted to little as David Vaughan mishit a cross.
Wales survived a scare after 62 minutes when Hennessey miskicked a clearance straight to Streller on the edge of the box.
A third Swiss goal looked inevitable but Streller's shot bobbled across goal and beyond the far post.
Bale launched another quick counter-attack down the left and picked out Church in the box but his first-time shot flew wide.
The Swiss hit back with Reto Ziegler forcing Hennessey to save with his feet and Stocker put the rebound over.
The match was settled eight minutes from time when referee Alain Hamer harshly penalised James Collins for a trip on Barnetta and pointed to the spot.
Inler made no mistake and it got worse for Wales as Stocker turned home an Eren Derdiyok cross with 89 minutes on the clock.