Pramac Ducati rider Martin started the 27-lap main race at Phillip Island from pole, and led the entire distance up until the final lap, having opted to run a soft rear tyre.
The Spanish rider was leading by 3.5 seconds at one stage but began to fall back towards his rivals, all running medium rubber at the rear, and was consistently losing four tenths a lap in the closing stages.
Martin began the final lap with only four tenths in hand over Pramac team-mate Johann Zarco, who passed at Miller Corner and went on to take a long-awaited first MotoGP win.
Title rival Francesco Bagnaia managed to follow Zarco through at the same corner, before Martin conceded further positions to Fabio Di Giannantonio and Brad Binder later in the lap to finish fifth.
Martin explained post-race that a lack of running during practice on the medium rear tyre favoured by the majority led him to adopt a strategy of trying to pull away using the softest compound.
"Now it’s really easy to understand what was the best [tyre] choice but it was my plan 100 percent to go for the soft," he said. "I tried it and it didn’t work.
"I only did seven laps on the medium [in practice], I didn’t try it a lot. Maybe this was the problem. I rode a lot with the soft and I thought this was the tyre for the race.
"I preferred to try and pull away, this was my strategy, but maybe I could have done it with the medium. We will never know. I was really convinced the soft was the tyre to choose."
Asked when he realised the soft tyre wouldn't last the distance, Martin replied: "With seven laps to go, I saw that I’m in trouble because they were catching by 0.4s [a lap] and I was pushing a lot.
"I was pushing on braking and a bit of corner speed, but I had no power, no rear grip and no tyre… I tried to finish the best I could and this was fifth position."
Having briefly taken the lead of the standings after the Indonesia sprint race last week, Martin now finds himself trailing Bagnaia by 27 points with four race weekends and Sunday's sprint at Phillip Island to go.
"It still depends on me so I need to be clever and not make these mistakes," said Martin of his title prospects. "I am the fastest, but if I don’t make the right choices in the race, it’s useless.
"If I am focused and don’t make these [mistakes] I think I can still win a lot of races this year."
Asked for his thoughts on the bad weather that has the potential to lead Sunday's sprint race to be called off, Martin said: "I hope we race tomorrow [in the sprint], even if it snows!
"I will try and [win] again, but if not I will try in Thailand, which is a really good track for me."
