In what was a competitive clash in Ukraine, Allahyar Sayyadmanesh's late goal was enough to see the hosts claim three points and condemn Brendan Rodgers' men to their first European defeat of the campaign.
The Foxes will now have to match or better SC Braga's result next weekend against Zorya if they are to top the group.
Story of the Match
Hosts attack from the off
With qualification for the knockout rounds still potentially on offer for Zorya, it was not a surprise to see them put Leicester under pressure from the opening minutes. Vladyslav Kocherhin at first drew a low save from Danny Ward before Yehor Nazaryna twice had efforts blocked.
The closest opportunity of the first-half though arguably belonged to the Foxes. A great exchange between the visitors' frontline saw Cengiz Under played through but the winger just pulled the ball wide of the far post with a low finish.
Much like in the first-period, Zorya started extremely well again after the interval and could have taken the lead soon after. Vladlen Yurchenko produced a late run to reach Oleksandr Hladkyy's cross but could only thump a powerful header off of the crossbar.
Leicester push for late winner
It wasn't all just the home side with the chances however and Leicester really should have taken the lead with 15 minutes remaining. Wesley Fofana, who replaced the injured Caglar Soyuncu, connected with Under's ball but planted his header off target.
Nikola Vasilj then had to be on top form to keep the Premier League outfit at bay as they hunted a late winning goal. He at first parried a Kelechi Iheanacho shot from range before also denying James Maddison on the rebound.
Zorya with a sucker punch
Despite looking increasingly like it was going to be Leicester as the side to score the winning goal, Zorya actually claimed a late strike. Finding space down the right flank, Denis Favorov sprinted away from Luke Thomas and pulled a great ball into the penalty area. With bodies flying in, it only took a solitary touch and the decisive one came from Sayyadmanesh as he powered the ball in at the back post.
Under, who was Leicester's biggest threat all evening, could have snatched an even later point than the Foxes earned in Portugal last week but his excellent effort was tipped away by an equally impressive save from Vasilj. The Foxes were just not quite able to find a way through though, falling to a shock defeat, whilst Zorya suffered elimination despite a memorable win.
Injuries continue to plague Leicester
Leicester fans will have been delighted to see Caglar Soyuncu, Ricardo Pereira and Wilfred Ndidi all return to the starting line up after long injury layoffs. The trio all had differing fortunes upon their recalls though.
Pereira and Ndidi were both replaced just before the hour mark which may have been in Brendan Rodgers' plans anyway. However, the Foxes were dealt a devastating blow in the first-half with Soyuncu pulling up with a problem and having to be replaced. Whether that is a recurrence of the injury he has already been suffering with remains to be seen but it is a worrying sign nonetheless.
Under the brightest spark
Despite the match not being the most thrilling for Leicester from an attacking sense, there was one positive; Cengiz Under.
The on-loan Roma man was the Foxes' most inventive player all evening, getting on the ball and showing a great touch. He looked the most likely to score for Leicester, having more shots than anyone else on the pitch with five.
For a side that only conceded 12 goals in as many games to start the season, Leicester do not look anywhere near as solid at the back. They have now shipped nine goals in their last four matches and could well have let in a few more. They looked vulnerable against Zorya and left far too much space as the hosts scored their goal.
Rodgers' men certainly have to tighten up if they are to get out of the indifferent run they currently find themselves in.