It was heartbreak for the blues in the Spanish capital as a late goal from Pauline Bremer proved not to be enough to keep them in the match.
Story of the match
Manchester City started the game well, creating chances through the midfield and Ellen White looking as if she could become a breath of fresh air for a blues side which has struggled to look poignant in front of goal against stronger opposition this season.
Both of the teams exercised strong build-up play throughout the match. Atletico proved difficult for City to break down in the centre of the park, but they were not able to trouble Ellie Roebuck in goal for most of the second half. It was much the same for the away side, Nick Cushing's eleven played their classic football, focusing on passing out from the back and looked much stronger than in previous games - although once again were muted in front of goal.
It was Atletico, however, who found the lead just before the end of the second half. A perfect looping ball found Ludmilla da Silva at the back post who immediately fired off a shot which was met by captain Steph Houghton, but it deflected off of her foot, then her neck before it ended up in the back of the net to leave the Spaniards with the advantage before the break.
No changes were made at the break, but Georgia Stanway and Lauren Hemp did swap sides for the blues. It immediately proved to be a useful difference, with Demi Stokes being played through behind the defence after a lovely one-two, and her cross only just not being converted by the head of Jill Scott.
The second half was played out much the same as the first, with two of the world's top sides playing end-to-end football in what was a very engaging game for any neutral viewer. City were once again on top for most of the game, with Atletico receiving a lot less chances.
However, Atletico were able to find their second of the game in the 68th minute through Silva. Charlyn Corral broke through on the left wing only for her shot to be expertly stopped by the hands of Ellie Roebuck, but the deflection from her parry fell to Silva who easily made it two.
German international Pauline Bremer provided City with a lifeline not long before the end. The blues had been banging on the door for a while, and Janine Beckie's deflected shot fell to Bremer who smashed past Van Veenendaal in the 88th minute.
Takeaways from the match
Manchester City still look to be struggling for firepower, and that is something that Nick Cushing will need to rectify quickly in a season that seems to have started to dwindle in form for the Blues. Sunday's loss to Arsenal was proceeded by a derby day defeat at Leigh Sports Village, and if they carry on as they currently are doing then it will allow Chelsea and the Gunners to widen the gap at the top of the table.
Atletico may not have dominated either of the games, but they were without a doubt the more clinical of the two when they received opportunities. Time and time again City had chances, but they struggled to convert where the Spanish side found it simple.
Manchester City - Ellen White
The Lionesses star has been sidelined with a knee injury since shortly after she joined in the summer. She made her debut for City as a substitute this Sunday in a loss over Arsenal. She proved a threat in her first start against Madrid, and may be the solution the Blues so eagerly need to their struggling to score against the stronger opposition in the league.
Ludmilla da Silva - Atletico Madrid
Da Silva was crucial in both legs of this UWCL tie and provided the ball that Steph Houghton turned in for the first goal. Her skilfull play was unmatched by the other players on the field, and without her the game could have played out very differently.