The team known as 'Yellow Submarine' because of their canary coloured strip, started the campaign in the Champions League after finishing fourth last year, but went in to Sunday's decider in 16th place and one point above the drop zone.
They looked to be safe from the drop as they held Europa League winners Atletico Madrid at bay with minutes left before disaster struck.
Atletico netted the only goal of the game in the 88th minute at a stunned Madrigal, and then, still only needing a draw to survive, Villarreal heard that Rayo Vallecano had scored in time added on to beat Granada 1-0 and send them down.
"I can't believe it," Villarreal vice-president Jose Manuel Llaneza told Spanish television. "I can't believe there can be so much heartache in only five minutes."
Behind him on the pitch, wealthy Ceramics tycoon and club president Fernando Roig was in tears.
"There is the president getting an ovation from the fans. I can't believe it. There is nothing left for us to do but to carry on working."
Villarreal had turned themselves into top-flight regulars over the last 12 years, and after reaching the Champions League semi-finals in 2006, where they lost out to Arsenal, became accustomed to competing on the European stage.
The club from just north of Valencia combined an attractive brand of attacking football with a productive youth and scouting system, and successfully survived the exits of players such as Diego Forlan and Juan Roman Riquelme.
This year, however, the formula fell apart.
The sale of Spain midfielder Santi Cazorla to Malaga for a lucrative 20 million euros raised eyebrows and his replacements, such as Canadian Jonathan De Guzman, failed to live up to expectations.
ROSSI INJURY
Leading scorer, Italy striker Giuseppe Rossi, tore knee ligaments in October and just when he was about to return suffered a relapse last month which will keep him sidelined well in to next season.
Villarreal lost all six group games to crash out of the Champions League and miss out on the Europa League, and after a humbling King's Cup exit to third-tier Mirandes, coach Juan Carlos Garrido was sacked in December.
His replacement Jose Molina only lasted until March when the experienced Miguel Angel Lotina took the helm.
Unaccustomed to the relegation scrap, and with the dour defensively-minded Lotina in charge, Villarreal opted for caution in the decider against Atletico and were undone at a corner in the dying minutes.
"We have gone down because we haven't done well," Spanish international goalkeeper Diego Lopez told reporters. "Today's game was evidence of that."
Captain Marcos Senna, who helped Spain win Euro 2008, apologised to the fans, some of whom barracked the team as they left the stadium.
"All I can say is we got it wrong, there is no need to look for culprits," Senna said. "This club does not deserve to be in the second division for
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