Millie Bright reacts to the final defeat
The Lionesses, looking to become the first England senior side since the men's team in 1966 to win the World Cup, suffered heartbreak after being outplayed by a Spanish side full of flair and creativity.
England's players fell to their knees in tears at the final whistle as Spain celebrated inside their penalty area after dealing with a final corner kick in the 14th minute of nerve-wracking stoppage time.
Spain captain Olga Carmona slotted the winner past goalkeeper Mary Earps in the first half, capitalising after England's Lucy Bronze lost possession in midfield.
England manager Sarina Wiegman, who has now lost two successive World Cup finals, introduced Lauren James and Chloe Kelly at half-time but Spain maintained control despite the Lionesses' best efforts.
Earps, who won the Golden Glove award as best goalkeeper at the tournament, made several stunning saves, none better than from the penalty spot to deny Jenni Hermoso in the second half.
The Manchester United stopper moved early to her left and caught Hermoso's effort, the penalty having being awarded for handball against midfielder Keira Walsh following a lengthy video assistant referee review.
But it was one step too far for the European champions, who lost just their second match in two years under Wiegman.
"I'm just deflated," said England defender Lucy Bronze. "Obviously we went into the World Cup wanting to win it and we were so close, but in the end we couldn't quite get it over the line.
"I am proud of what we have achieved but I think everybody that knows me, knows that I only like gold medals."
Spain are crowned champions for the first time despite going into the tournament under a cloud of controversy following a dispute between players and the Spanish football federation.
Both teams came into the final full of confidence, having improved on their performances throughout the tournament.
England, who played in front of a sold-out Wembley crowd last summer to win the Euros final, started brightly, testing Spain's defence with balls over the top and in behind.
Manchester City forward Lauren Hemp was direct and aggressive, and had England's best chance but her curling effort from 15 yards hit the crossbar.
However Spain, packed with Barcelona stars who won their second Women's Champions League title this season, imposed their quality and worked out how to deal with England's high press.
They dominated large chunks of the game, exposing the spaces left by England's attacking full-backs and took their chance when Bronze cut inside from the right and gave the ball away when she was stopped by a wall of red in the centre circle.
Spain intelligently switched play to their left and Carmona ran on to a simple pass from Mariona Caldentey before stroking the ball low past a diving Earps.
Spain had several chances to extend their lead - Earps blocked shots from Ona Batlle, Caldentey and Alba Redondo in each half - while Salma Paralluelo's first-time strike brushed the post on the stroke of half-time.
It was a deserved victory for Spain but it will feel like a missed opportunity for the Lionesses, who have found a way to win so often under Wiegman but could not find the answers in the biggest game in their history.
Prior to this year's competition, Spain had only ever won one Women's World Cup match.
They had suffered defeat at the hands of England in the Euro 2022 quarter-finals but unlike that evening in Brighton when the Lionesses came from behind to win 2-1, Spain stuck to their task and saw out victory.
The streets of Sydney, which had been draped in green and gold for most of the competition, were transformed on Sunday to represent Spain and England's colours.
England fans came dressed in costumes, banging drums and chanting on the city's trains en route to the stadium and though they dominated numbers in the crowd, it was Spain's supporters celebrating at full-time.
Bronze, 31, was in tears lying on the pitch at full-time and had to watch on as many of her Barcelona team-mates danced for the cameras while they prepared the stage for the trophy celebration.
She has won almost everything in the game but still cannot get her hands on the most desired trophy of them all.
"The goal is always to win tournaments with this team. We have shown that we can do that," added Bronze.
"We have made a final. There is no reason why the team can't go and create more legacies and more winning legacies."
Meanwhile, Spain's achievement is a remarkable one given manager Jorge Vilda survived a player revolt less than 12 months ago. That unrest in the set-up meant they were missing Sandra Panos, Mapi Leon, Patri Guijarro and Claudia Pina, who all helped Barcelona win the Champions League in June.
Their victory could transform women's football in Spain, which has been thrust into the limelight in recent years following Barcelona's domestic success.
-- Courtesy of BBC Sport