The Spaniard won the first set of the encounter 6-4, but Djokovic came back in the second to record a 7-6 victory.
The world number one couldn't deliver the goods in the final set, though, with Carreno Busta winning the decider 6-3 to claim the bronze medal.
Djokovic's dreams of winning the 'Golden Slam' of all four majors and gold at the Olympic Games is now over.
The Serbian tennis superstar just couldn't produce his best form in the defeat to Carreno Busta, something that evidently bothered him in the final set.
Djokovic actually lost his head on two separate occasions towards the end of the match, with his frustration at what was unfolding on the court clear for all to see.
He first threw his racket into the stands after Carreno Busta saved a break point in the opening game of the third set.
Djokovic went on to lose the first three games of the set, which prompted him to smash his own racket against the net post, for which he received a warning.
You can check out footage of both incidents below.
Djokovic loses his head vs Carreno Busta
Oh dear, Novak.
After the enthralling match versus Carreno Busta in Tokyo, Djokovic stated that while his Olympic campaign didn't end in the best way, he has no regrets about travelling to Japan.
"I do have a regret for not winning a medal for my country," he said, per Daily Mail. "Opportunities missed both in doubles and singles. I didn't deliver yesterday and today, the level of tennis dropped, also due to exhaustion, mentally and physically.
"But, I don't regret coming to the Olympics at all. Of course not. I believe there is no coincidence in life, everything happens for a reason, and I had some heartbreaking losses at Olympic Games and some big tournaments in my career, and I know that those losses have usually made me stronger, in every aspect.
"I know that I will bounce back. I will try to keep going for Paris Olympic Games, I will fight for my country to win medals and I'm sorry that I disappointed a lot of sports fans in my country but that's sport.
"I gave it all, whatever I had left in the tank, which was not so much. I felt it out on the court. The consequences physically hopefully will not create a problem for me for US Open. That's something that I'm not sure about right now.
"But I'm not regretting giving it all because, when you play for your country, that's necessary."
On his loss of control on the court, Djokovic added: "It was an emotional outburst and it happens. It's tense on the court. In the heat of the battle. It's not the first time and not the last time probably.
"It's not nice of course but it's part of, I guess, who I am. I don't like doing these things. I'm sorry for sending this kind of message but we're all human beings and sometimes it's difficult to control your emotions."News Now - Sport News