A brace from Alexis Sanchez gave England a disappointing start to their preparations for next summer's World Cup.
The Barcelona forward started the game superbly and opened the scoring after just seven minutes with a fine header.
England tried to come back and had some good opportunities, but didn't manage to score.
Deep into added time, Alexis put the game to bed with a wonderful dink over Fraser Forster, whose debut wasn't a one to remember.
England started the game with three debutants in the form of Forster, Jay Rodriguez and Adam Lallana and a total of eight changes from their last game against Poland.
The home side started very well and came close to scoring, but Phil Jones' header was saved by Claudio Bravo and luckily for Chile there was no-one following up to tap home.
Two minutes later there was a goalmouth melee in front of the visitors' goal.
James Milner was left alone on the right, drilled the ball in the box, but a Chilean defender kicked it away. Then the ball was again crossed in the box and this time the ball was cleared to safety.
Yet in the counter-attack Charles Aranguiz came down the left wing and crossed the ball superbly to Alexis, whose back-post header flew into the net to make it 1-0 for Chile.
The visitors continued to push and came close to doubling their lead, but Jean Beausejour's fizzing shot was smartly saved by Forster.
In the 20th minute England captain Frank Lampard unleashed a deadly shot from a 35-yard free-kick, which took a slight deflection from the wall and was saved by Bravo.
At the half-hour mark Beausejour came from the back to the front and could have scored, but Forster got out and forced him wide. Yet the Wigan player crossed the ball and Eduardo Vargas' shot was blocked.
Just before the break Jack Wilshere chested the ball down and picked out Wayne Rooney on the left wing. The Manchester United forward then played a lovely pass to Lallana, but his shot went wide via a deflection.
England continued to push for a goal in the second half, but in the fifth minute of added time Gary Cahill made a mistake and just gifted the ball to Alexis Sanchez, who made a wonderful dink over Forster to put the last nail in England's coffin and made the final result 2-0.
ENGLAND: Forster 6, Johnson 6, Baines 6, Milner 6, Cahill 5, Jones 5, Wilshere 5, Lampard 5, Lallana 6, Rooney 6, Rodriguez 5. Subs: Smalling 5, Townsend 6, Defoe 5, Henderson 5, Cleverley 5, Barkley 5.
CHILE: Bravo 7, Mena 6, Gonzalez 7, Isla 6, Vargas 6, Fernandez 6, Beausejour 6, Medel 6, Aranguiz 7, Diaz 6, Sanchez 8. Subs: Jara 6, Carmona 6, Gutierrez 6, Munoz 5, Fuenzalida 5.
Man of the match: Alexis Sanchez (Chile) - A class act from the Barcelona striker, who scored both goals and was a constant threat for England's defence.
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