Southampton lost out on penalties in the Trofeo Memorial de Quinocho, in Vigo.
The competition is held annually to commemorate the death of former player and manager Joaquin Fernandez Santomé, who was stabbed to death in October 1988.
Southampton became only the second English competitors, following Wigan Athletic, who lost last season's final by a 1-0 scoreline.
Celta Vigo seeked some early initiative, with Augusto Fernandez rifling a shot on goal, only to see it turned behind by a Dejan Lovren deflection.
The resulting corner provided a second opportunity, as the ball broke to centre-back Andreu Fontas, who slammed a thirty-yard strike against the Southampton crossbar.
Jay Rodriguez was to make Southampton's first attacking impact, as he burrowed forward down the left-hand side. His centre was too soft however, and allowed Yoel to gather in the Celta goalmouth.
Gaston Ramirez carried out some great work in the centre of the park, winning the ball and spinning away before splitting the defence with a lofted pass. Unfortunately for the Uruguayan, Luke Shaw's driving run and cross came to nothing.
Rodriguez was to demonstrate the work-rate he has become well-known for on the south coast once again, this time dispossessing Gustavo Cabral. Rodriguez raced clear of the defence before tamely side-footing wide of the target.
Southampton had the ball in the net after just twenty-four minutes. Fortunately for Os Celestes, the linesman had adjudged Rickie Lambert to be offside when Gaston Ramirez played the pass.
The Saints further demonstrated their dominance in this period, as Ramirez's free-kick was headed narrowly over by Dejan Lovren. Another headed opportunity was soon to follow, as youngster Calum Chambers swung over a deep cross to Rickie Lambert, whose powerful header flew over the bar.
Celta Vigo tried to force their way back into the game, but were twice denied by the head of Dejan Lovren from set-pieces.
Ramirez was to prove pivotal once more, playing Lambert in, before a smart Yoel stop forced a corner. Ramirez was to take the resulting corner, swinging it in as Dejan Lovren went close once again for the Premier League side.
The La Liga side were to spurn a great opportunity just on the stroke of half-time, though. Left-back Toni raced clear of Calum Chambers before lifting a ball to the back post, only to see Augusto Fernandez head agonisingly wide.
Southampton made nine switches at the break, with only academy graduates Luke Shaw and Calum Chambers remaining in the two full-back positions. Celta Vigo meanwhile, simply opted for a change of goalkeeper, replacing Yoel with Alvarez.
Vigo were to have the first meaningful attempt of the second half, as Toni once again provided for Augusto, whose shot was well-saved by Polish 'keeper Artur Boruc.
On the hour mark it was Celta's turn to make nine substitutions, with Hugo Mallo and Orellana the only remaining players. Mallo was to last just ten minutes longer, before he was replaced by Jony Castro.
After challenging Castro for possession, Luke Shaw tumbled to the ground clutching the instep of his foot. After leaving the field for treatment, Shaw returned briefly before manager Mauricio Pochettino opted to introduce former Burnley left-back Danny Fox.
James Ward-Prowse played in Brazilian maverick Guly Do Prado, who cut in from the left flank before firing a shot wide of the right post.
With time slipping away, Celta pushed once more for what would've been a match-winning goal, but Southampton's Danny Fox stood firm to deny Mavinda that right.
Southampton battled back, as Steven Davis saw his shot well saved by Alvarez, after initially being teed up by Portuguese defender Jose Fonte. Southampton forced two late corners, before Guly Do Prado powered a header off of the bar and behind.
At the end of ninety minutes, the scores were still deadlocked, resulting in a penalty shoot-out.
Southampton failed to convert on two occasions, with Guly Do Prado skying over. James Ward-Prowse was denied by 'keeper Alvarez, whilst Steven Davis managed to find the back of the net with a well-placed penalty kick. Celta Vigo converted all four of their penalty kicks, with David Rodriguez, Fabian Orellana, Alex Lopez and David Goldar scoring.
The victory means that Os Celestes have now won the trophy on 16 occasions, losing just twice.
Southampton have just one game remaining before the start of their Premier League campaign. They host Real Sociedad at St. Mary's Stadium this coming Saturday, before facing West Bromwich Albion in their first game of the new Premier League season.
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