The Lions are now four points from safety with a vastly inferior goal difference after goals from teenager Jordon Ibe, Andrew Shinnie and Nikola Zigic gave the Blues a crucial win in their own bid to beat relegation.
Steve Morison had levelled Ibe's opener and substitute Simeon Jackson scored an 88th-minute penalty to give the Millwall faithful hope, but there was no way back for Holloway's men.
It means the Londoners have not won in six at home and have collected just a point from their last four matches, and with relegation rivals Charlton and Barnsley both winning, things are looking bleak.
Holloway had called it the biggest match of his life before kick-off, but despite suffering defeat, he believes five wins from their last eight games will be enough.
"We've got eight games left and we've probably got to win five of them, then we might stay up," he said.
"You probably think I'm crazy but I don't. I think we can do it with the chances we are creating.
"I'm devastated, I have to say that. It was a must not lose game and we've lost it. We've got to keep fighting.
"There has been some frank and honest words said in the dressing room. The players are hurting, believe me.
"I'm sick and fed up of talking, it's about action now. I believe we can still do it after everything I saw.
"That's as bad a result as I've had in my career and I still feel positive. We've got life in us and we're still going to fight.
"I'm totally determined to get this right. I don't quit on things. Everybody will write us off now, but not me and not us."
Birmingham, meanwhile, eased their relegation fears with a first win in six matches, moving up to 19th place and on to 40 points, eight above the bottom three who all have 32.
Charlton, in 21st place, have three games in hand however, and Blues boss Lee Clark is still looking over his shoulder.
"We're not safe yet. Until it's mathematically impossible for us to get dragged into it we have to keep going," he said.
"I see the results the teams in and around us have got this evening and it just tells me it's never over until it's over.
"It's impossible to have a target in mind. Last season showed anything can happen.
"We have a huge game on Saturday [against Bournemouth] and a positive result could take us even further clear."
Clark also reserved special praise for on-loan 18-year-old Ibe, adding: "He's a young player but really talented. We've just got to be careful with him. He's highly thought of by his club and his manager Brendan Rodgers and we know we have an exciting talent.
"He's shown the talent at certain times over the season but he needs the consistency. If he gets that, he will be a terrific young player at a big club."