Tony Vidmar’s team looked on track for a crucial three points after a brace from striker John Roberts had them leading 2-0 at the break.
But Vietnam stormed back in the second half, drawing level by the hour mark before Nguyen Duy Khiem scored five minutes from time completed a 3-2 win in Group B.
The Joeys took the lead on 18 minutes, as Roberts towered above the Vietnamese defenders to head in Louis D'Arrigo's in-swinging corner.
Roberts, the Joeys skipper, then doubled the lead 10 minutes later as he capitalised on a mishit back pass to round the keeper and sweep the ball into an empty net.
"We then lost two midfielders to injury [Adrian Viggiani and Fabian Monge], and they were players who were controlling the game for us and that was the turning point,” Vidmar conceded.
“Our shape went out the window, they scored one and then the second and third goal killed us off."
In the group’s other match, Japan crushed Kyrgyzstan 8-0 to ensure they will top the group and progress to the quarter-finals.
"We started off well, took control of the game, and got the goal we were looking for,” Vidmar added.
“But after that we panicked, turned the ball over a lot more. We looked nervous in defence, we didn't have the same intent and urgency to win the ball back.
“We got a lucky goal but panicked after that and maybe focused too much on the scoreline.”
The Joeys lost their opening group game 1-0 to Kyrgyzstan.
Their final group match is against Japan on Thursday afternoon.
Joeys' starting XI
Nicholas Suman (GK), Dylan Pierias, Joel King, Adrian Viggiani, John Roberts (c), Thomas Aquilina, Rahmat Akbari, Louis D’Arrigo, Mark Moric, Adrian Valenti, Fabian Monge
This article was originally published at: http://www.footballaustralia.com.au/article/joeys-exit-afc-u-16-championships/1rn8gttg6fot21rsoyuhnd64ir.