The Easter Road side - beaten finalists in the last two years - fell to their fourth straight loss in an absorbing contest.
Raith twice went ahead in the first half through goals from Kevin Moon and Dougie Hill but were pegged back by Sam Stanton and Michael Nelson.
In an engrossing second period, Grant Anderson scored the decisive goal with a header from a Joe Cardle delivery.
Butcher, who handed the impressive Duncan Watmore a debut after recruiting the winger on loan from Sunderland last month, was furious with the performance.
He said: "No words can describe that, there are a few but I can't repeat them.
"I am bitterly disappointed because with our performance, we didn't deserve anything at all.
"Fair play to Raith, they rubbished us at the back, they passed it well and stopped us from gaining any sort of moment.
"I can't believe we have turned in a performance like that when we've worked so hard during the week to win the game.
"It was unbelievable. We showed a bit of character to come back twice but second half they seemed to get a grip, especially in midfield.
"I felt sorry for Duncan and Sam Stanton, those two very were good but the rest were very poor."