After about 3-1/2 hours of play, Lee, one of the greatest players of the ancient board game in the modern era, resigned when it became clear the AlphaGo computer had taken an unassailable lead.
"I was very surprised because I did not think I would lose the game," a clearly shocked Lee told reporters.
"I think a mistake I made at the very beginning lasted until the very end," he added, without elaborating.
"And I didn't know AlphaGo would play the game in such a perfect manner."
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But its creators had been bullish going into the match at the Four Seasons hotel in the South Korean capital, saying the computer, which employs algorithms that allow it to learn and improve from matchplay experience, was even stronger than when it took on Fan.
"We are very, very excited by this historic moment and very, very pleased with how AlphaGo performed," Demis Hassabis, the CEO of AlphaGo developer DeepMind, said after the victory.
The five-day battle for supremacy between man and machine has been seen as a major test of what scientists and engineers have achieved in the sphere of Artificial Intelligence (AI) over the past 10 years or so.
The most famous AI victory to date came in 1997, when the IBM-developed supercomputer Deep Blue beat the then-world class chess champion Garry Kasparov.
But experts say Go presents an entirely different challenge as the complexity of the game and incomputable number of move options mean that the computer must be capable of human-like "intuition" to prevail.
When Lee first accepted the AI challenge, he had confidently predicted a clear-cut win, saying that AlphaGo's performance against Fan had been nowhere near good enough to defeat him.
But the grandmaster had confessed to some pre-match nerves yesterday.