Luxembourg came into the match with more Eurovision Song Contest victories than World Cup qualifying wins, with five of the former and just three of the latter, but they narrowed the gap when Mathias Janisch stabbed home in the 87th minute to record a well-earned win.
Northern Ireland had taken the lead through Martin Paterson and then levelled at 2-2 thanks to Gareth McAuley's header but were comfortably second best and would have been fortunate to leave with a point.
O'Neill has been buoyed by strong showings against the likes of Russia and Portugal in Group F but this was a nadir and he did not pull any punches in his assessment.
"It was a really poor performance - we lacked energy, intensity, intelligence. The management of the game from start to finish was pathetic," he said.
"We got what we deserved. We didn't deserve anything...Luxembourg were the better side. It was a really, really poor performance.
"There was not a single positive out of that game."
Asked to put his finger on a precise reason for the way his side were outplayed by a side languishing 140th in the FIFA rankings, O'Neill had plenty.
"Lack of energy, lack of desire to play, lack of intensity, lack of leadership. Take your pick," he said.
Northern Ireland were cheered on by an impressive away contingent of 1,200 - a group who did not turn on the side even as the game slipped from their grasp in the second half - and O'Neill offered a frank apology to them.
"I feel for the people who have travelled to watch that," he said. "It's not acceptable and not the level of performance I would expect from my team.
"The players are pretty clear on my feelings. As a manager and a group of players we owe the fans an apology."
O'Neill was controlled but simmering beneath the surface as he offered a scathing verdict on what he had seen and the positivity of last month's morale-boosting 1-0 win over Russia seemed an age ago.
"When we drew the home games against Luxembourg and Azerbaijan I had a certain level of sympathy because I felt on the night we did a lot of positive things, but this was as poor a performance as I've ever been associated with," he said.
"If we are at it all of the basic ingredients for playing football are there and we've shown what capable of. But if we're not we have no right to think we're better than Luxembourg or Azerbaijan or anyone out there. That has been proven."
Luxembourg boss Luc Holtz was effusive in his praise for the hosts, who last won a World Cup qualifier in 1972.
"This was one of the best games our team has seen in a long time," he said.
"Northern Ireland's first shot on goal went in, so we were unlucky, but in our eyes our team played much, much better.
"It was a very good performance. The whole team was brilliant.
"We like to play the attacking way and the players like to do this too. This is the way we will play in the future."
- Sports & Recreation
- Northern Ireland