The result leaves Real in third with 51 points, 14 behind leaders Barcelona.
Real are now third in LaLiga, 14 points behind leaders and rivals FC Barcelona, who have a game in hand.
Karim Benzema and Cristiano Ronaldo. FELIPE SEVILLANO
The defeat for Zinedine Zidane's charges is now their fifth of the La Liga season and could see them fall 17 points adrift of top spot if Barcelona beat Las Palmas on Thursday.
Despite Zidane claiming his side "played well in the first half but didn't manage to score" and that "we did not deserve this defeat in the last minute" Madrid were mediocre at best. We didn't play our game or with substance in the second half.
Real Madrid take on Getafe next in La Liga before their crucial Champions League last-16 second-leg clash with Paris St-Germain.
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No sooner had Madrid impressed on Saturday against Alaves by winning five fixtures in a row for the first time in 2017-18 than suffered another setback and it is really the story of their season.
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Gerard Moreno struck in the 94th minute at the RCDE Stadium as Real's rotated line-up felt the full punishment for a slack and disjointed display.
Currently, the Catalans sit seven points ahead of Atletico Madrid, who they host on Sunday, and victory would open up a ten-point gap.
The champions saw their five-game winning run in all competitions emphatically ended when Gerard Moreno slammed home a dramatic late victor for lowly Espanyol. "This result restores our confidence after a series of poor results".
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Following the game, Zidane spoke about his decision to send Ramos up front while saying his team didn't deserve to win or draw.