Lee relinquished a two-shot advantage with three holes to play, then three-putted the first extra hole as former world No.1 Jin Young Ko rallied for a thrilling third victory at the event.
Starting the final round four strokes off the pace, Ko closed with a Sunday-best 67 to join Lee (71) at 13 under and force the playoff.
In a showdown of multiple major champions, Ko held firm as Lee faltered to leave the South Korean to add the title and $US450,000 ($A677,000) winner's cheque to her 2019 and 2021 Founders Cup trophy collection.
Playing the par-4 18th again, Lee had a 20-foot putt from the fringe to defend the trophy she won last year, only to put it six feet past and then miss the return for a shock bogey.
The world No.6's deflating finish came barely an hour after Jason Day snapped a five-year, two-month PGA Tour title drought at the $US9.5 million ($A14.3m) AT&T Byron Nelson Championship in Dallas, Texas.
Lee never produced her best golf on Sunday but did look every bit the winner standing on the 16th tee.
The West Australian had let a three-shot overnight lead slip after finding the water and posting a dreaded double-bogey five on the par-5 sixth.
But she tenaciously clawed her way back with a birdie at the very next hole before adding three more on the back nine to charge two shots in front.
Alas, a three-putt on the 17th opened the door for Kim, who marched through with a long bomb for birdie at the last before the world No.3's par at the first extra hole proved good enough for victory.
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