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.