The Liverpool athlete was leading by two points until the death.
The three-time world champion led South Korea’s Dabin Lee by two points but a three-point head-kick right on the button gave her opponent a 25-24 win and a place in the final.
It echoed Lutalo Muhammad’s last-second loss in his gold medal match in Rio in 2016, and swiftly followed defeats for team-mates Bradly Sinden and Lauren Williams, both of whom had to settle for silver medals after seeing leads overturned late on.
Walkden, who was also edged out in the final in Rio before rallying to claim bronze through the repechage, was faced with the prospect of having to raise herself for a similar shot at a place on the podium in the Japannese capital.
But whilst Sinden and Williams will be able to reflect on highly successful campaigns, missing out on gold again will represent a crushing blow for Walkden, who has largely dominated her +67kg category for the best part of a decade.
She had started with an efficient 17-7 win over Cansel Deniz of Kazakhstan but faced a tough test against Lee, like Walkden a reigning world champion but in the higher, non-Olympic 73kg category.
Walkden struggled to take control of the contest despite erasing a 3-1 deficit at the end of the first round and heading into the final three minutes locked together at 10-10 with her opponent.
A two-point body kick gave Walkden a brief lead and she went back in front with 10 seconds remaining. As Sinden and Williams had already underscored, 10 seconds is an awful long time in taekwondo.