Muhammad opened his campaign in Puebla, after a first-round bye, with a high scoring 15-11 victory over Moises Molinares to set up a third-round clash with Rafael Castillo.
But while Muhammad was able to brush Columbian Molinares aside in their -87kg contest, he couldn't do the same with Castillo as he went on to clam gold for Cuba.
Muhammad was picked off by Castillo on the counter in the final stages and was caught with a second head shot in going for broke, the Brit eventually losing by a scoreline of 10-3.
Fellow Olympic medallist Jade Jones, who won gold at London 2012, is next up for Britain along with European champion Michael Harvey with Muhammad conceding his plans for Castillo went awry.
"I had some clear tactics going into the fight but unfortunately I didn't execute them well, particularly in the last round," said Muhammad.
"He's obviously a top-class player and I found it difficult to deliver my game plan. I tried to rush things in the last round and he was able to catch me on the counter.
"I felt in great shape and started well in the morning. It just came down to meeting someone who was too good on the day.
"He was a great opponent but I'm very disappointed with myself. I've set high standards and wanted to perform better.
"I just want to say sorry to all those who were watching it back home and didn't see a better performance.
"But I'll be back for the Grand Prix later in the year and the best is yet to come."