Luis Suarez headed Uruguay into a half-time lead before Wayne Rooney’s first Word Cup goal drew England level with 15 minutes left.
However, with five minutes to go, Suarez fired home his second goal of the game after his Liverpool team-mate, and England captain, Steven Gerrard had flicked on a long ball.
A second defeat in Group D means that, to stand any chance of reaching the last 16, England must beat Costa Rica in their final group game, and hope Italy also beat the Central American side and Uruguay.
Hodgson could not hide his desperation at the manner of his team's defeat and did not expect to lose after Rooney had equalised.
"We are more than disappointed, we're devastated," he said.
"We believed we could do enough to get a result in this game. Having worked so hard to get back to 1-1 I believed we would go on to win the game or at least draw, so to concede the second goal is an unbelievable blow. I don't really know what to say at this time.
"It was a goal we don't expect to concede. Long goal kicks with the type of players we have in the team, we deal with them.
"I thought we would go on possibly to win the game and certainly I didn't think we would lose the game at that point.
"We had been in control for such a long time. After the first five minutes (of the second half) we got back on track. We've been near their goal so many times, but it doesn't matter how many times you get near the other team's goal, it matters how many times you put it in the back of the net and we haven't done that enough."
Suarez had knee surgery four weeks ago and was an unused substitute during Uruguay’s 3-1 defeat by Costa Rica in their opening group game.
Regarding Suarez’s brace, Hodgson said: "He scored the two goals. The first goal in particular was exceptionally good, Cavani's chip and his pulling away to the back post and the cleverness of his header I thought was really top, top play.
"The second one I thought he was a bit fortunate, but when he got himself through he made no mistake."