Michael O'Neill's charges, who had Jonny Evans sent off for the foul that led to Azerbaijan's injury-time second, were guilty of missing a host of chances at the Bakcell Arena in Baku as they slipped to a fifth defeat in Group F.
Rufat Dadashov had the Azerbaijan supporters on their feet in the 58th minute when he rounded off a neat move by side-footing beyond Roy Carroll.
And there was a late second goal when Mahir Shukurov capitalised on Evans' dismissal by curling home a free-kick from 20 yards.
Martin Paterson was also guilty of wastefulness prior to Dadashov's strike when he dragged wide from eight yards and the Huddersfield Town striker also hit the bar with two minutes remaining.
O'Neill welcomed back Chris Brunt from suspension, meaning Niall McGinn dropped to the bench.
Northern Ireland continued to press and Ward's 23rd-minute header from Paterson's centre forced a superb point-blank save from Agayev.
The visitors' profligacy was almost punished when Dadashov flashed an eight-yard strike wide of the post.
First Ward scooped a loose ball over the crossbar, before Paterson dragged wide after his strike partner's throughball put him one-on-one with Agayev.
Azerbaijan came out the stronger side after the break and Dadashov should have done better when he sidefooted Shukurov's cross wide.
Soon after, the forward did break the deadlock. Araz Abdullayev slid an intricate ball into Aliyev's path and his low cross was converted at Carroll's near post.
Paterson went closest in the 88th minute, receiving Steven Davis' pass before unleashing a vicious effort against the woodwork.
Evans duly saw red for an off-the-ball challenge on Aliyev and Shukurov's resulting free-kick put the result beyond doubt.
Azerbaijan finish their campaign with a home fixture against Fabio Capello's Russia on Tuesday, while Northern Ireland travel to Israel looking to avoid finishing bottom of the group.
