The American, 22, was hit by a four-stroke penalty in the final round after a viewer alerted officials to a rules infringement from day three.
Thompson, who was leading Norway's Suzann Pettersen by two shots with six holes to play, was subsequently deemed to have incorrectly replaced her marked ball on the 17th green in the third round.
She was informed of the decision heading to the 13th tee Sunday.
"Is this a joke?! Oh my God," she said. "Four-stroke penalty, that's just ridiculous."
Visibly shaken, with tears streaming down her face, Thompson rallied to force a playoff with South Korea's So Yeon Ryu, but was unable to fully recover.
Ryu birdied the first extra hole to lift the Dinah Shore trophy and take the traditional celebratory dip in Poppie's pond.
'It made me sick'
LPGA Tour rules official Sue Witters acknowledged the peculiarity of the ruling, telling reporters it made her "sick" to have to break the news, but contended her team had no option but to bring Thompson's infringement to light.
The Ladies Professional Golf Association released a statement saying Thompson had received an initial two-stroke penalty for breaching Rule 20-7c (playing from the wrong place) and incurred a further two-stroke penalty under Rule 6-6d for returning an incorrect scorecard.
Thompson was "immediately notified" of the penalty as soon it was confirmed by video review, the statement claimed, but the player denied deliberately seeking to gain an advantage on the one-foot putt the day before.
"Well, it was an emotional day here for me," said Thompson. "First off, I do want to say what I did was 100% not intentional at all. I didn't realize I'd done that.
"To the fans out there -- words can't describe what you being there meant to me.
"You helped push through those last holes so thank you for always believing in me."
Even Tiger Woods took to Twitter to vent his indignation at Thompson's treatment, saying: "Viewers at home should not be officials wearing stripes." He urged his compatriot to go ahead and "win this thing anyway."
Thompson still had a chance to seal victory in regulation play but was unable to sink a 20-foot eagle putt on the 18th, and Ryu was the beneficiary in the resultant playoff.
"I cannot believe the situation," said the South Korean. "I didn't even check the leaderboard, Lexi was playing so well."
Ryu's elation at winning her first major since the 2011 US Open was tinged with the irregularity of its source.
"It hurts me too," she said. "It's a weird feeling but at the same time I am proud of myself."
It was a result that prompted 2010 US Open winner Graeme McDowell to call for a "simplification" of the rules.
Thompson's infringement is not the first high-profile incident in recent years. Just 10 months ago, eventual US Open winner Dustin Johnson was forced to play his last seven holes knowing he could face a possible rules infringement after the round.
It didn't stop the current Masters favorite
winning his long-awaited first major, but did lead to an outcry against the officials, with Woods branding it a "farce" and Rory McIlroy calling the situation "ridiculous" and "amateur hour."
Thompson, at least, found solace in the mental strength she had shown. "I learned a lot about myself and how much fight I do have in me," she said, having wiped away the tears and picked up a standing ovation from the gathered crowds.
"Every day is a learning process. I wasn't expecting what happened today but it is what it is. It happens, I'll learn from it and hopefully I'll do better."