Tuesday night's Windsor Park encounter in Group F had started so promisingly for Michael O'Neill's side, with Dean Shiels claiming his first international goal with a deft finish in the 14th minute.
The hosts had nearly all of the meaningful chances thereafter, with three efforts disallowed by the officials and Chris Brunt hitting the post, only for Daniel Da Mota's shot to squirm home via Ryan McGivern's shoulder.
Coming on the back of a 2-0 defeat to Russia, Northern Ireland's World Cup qualifying hopes are already hanging by a thread.
Having set his team out for containment in Moscow, with Kyle Lafferty often stranded at the head of a defensive 4-5-1 formation, O'Neill selected a more attack-minded XI in Belfast.
Shiels returned in the number 10 role, with Shane Ferguson back on the left side of midfield and the more aggressive McGivern replacing Craig Cathcart behind him.
Northern Ireland started with real purpose, almost scoring in the first minute.
The chance came from a corner, won after good interplay between Lafferty and Shiels.
Brunt floated it to West Brom team-mate Gareth McAuley who, after winning the header, directed the ball straight at the goalkeeper.
A loose pass from McGivern gifted Aurelien Joachim space to shoot, only for Jonny Evans to make the block.
Then Northern Ireland took the lead through Shiels.
Somewhat surprisingly Evans played the role of creator, surging upfield and exchanging neat passes with the Rangers man.
Evans' second pass cut open the defence and Shiels lifted his shot deftly over the oncoming Jonathan Joubert.
After 21 minutes Evans thought he had made it 2-0 himself from a neat corner routine but the goal was ruled out due to a push.
There was disappointing news in the 29th minute when McAuley received his second booking in as many matches to rule him out of next month's trip to Portugal.
The hosts had a second effort disallowed soon after, Lafferty stroking a fine effort into the top corner after good work from Chris Baird, only to be pulled up for offside.
In the five minutes before half-time, Northern Ireland had three presentable chances to add to their lead.
Shiels failed to make the most of Guy Blaise's slip, then Lafferty chipped high and wide after being teed up by Brunt, who himself might have shot.
The West Brom man then found Baird with a bullet corner, but the latter's header flashed inches wide of the far post.
Luxembourg sent on Maurice Deville to lead the line for the second half in place of Joachim and they looked a sturdier proposition as the second half got under way.
Winger Mario Mutsch attempted to stretch the home back four five minutes into the second period but Evans was on hand with a forceful sliding tackle.
A McGivern overlap set Northern Ireland back on the attack but although Shiels got his head to Steven Davis' cross, a red shirt blocked it on its way towards goal.
Unbelievably, the home side had a third effort struck off by the officials on the hour, Lafferty in an offside position when he sidefooted Ferguson's cross home.
Had their advantage not been so slender, Northern Ireland may even have found some humour in the situation.
Lafferty, given onside for once, saw a 20-yard shot brush the outside of the post via Joubert's gloves but otherwise the closing stages were an increasingly nervy affair as Luxembourg pressed forward.
Davis gave Brunt the chance to ease the pressure with seven minutes left but, after meeting the carefully-measured pass, he rolled his shot against the base of the post.
Then, just moments later, the sucker punch arrived.
With too many green shirts committed forward, Luxembourg surged up the pitch and a shot opened up for Da Mota.
His effort appeared to be heading wide until it took a huge deflection off McGivern's shoulder to leave Roy Carroll stranded.
The Luxembourg bench celebrated emphatically, leaving the home fans to boo their players off at the final whistle.