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The match was played at the Butarque Municipal Stadium in Leganes, which Rayo Vallecano is using as an alternative venue due to the continued poor condition of the Vallecas pitch.
Argentine coach Diego Simeone made nine changes to the starting lineup that thrashed defending champions Barcelona 4-0 in the first leg of the Copa del Rey semi-final at the Wanda Metropolitano Stadium.
The loss to Rayo Vallecano comes three days before the capital club faces Club Brugge in the first leg of their Champions League play-off tie in Belgium on Wednesday.
Atletico Madrid now trails its fierce rival Real Madrid, the current league leader (60 points), by 15 points and second-placed Barcelona by 13 points (58 points), ahead of the latter's match against Girona on Monday, where they have a chance to reclaim the top spot. Atletico Madrid has dropped to fourth place, level on points with third-placed Villarreal, who have a game in hand.
In a match played before a nearly half-capacity stadium, Rayo Vallecano surprised its visitors with an early goal in the 40th minute through winger Fran Pires, who capitalised on a run by Romanian full-back Andrei Rășu.
Oscar Valentin added a second goal after following up on a rebound from Slovenian goalkeeper Jan Oblak following a shot by captain Ezi Palacio (45).
In the second half, young Senegalese defender Noble Mendy headed in a third goal for the home side (76).
Goalkeeper Jan Oblak angrily told the streaming service DAZN, "It seems the league title has slipped through our fingers. We can't afford to lose matches like this, nor can we afford to perform like we did today."
Oblak added, "At this level of competition, it's going to be very difficult. You can't choose your matches; every game has to be played at the highest possible level..."
Oblak continued, "Today they were much better than us, congratulations to them. We lost, and we deserved to lose."
Rayo Vallecano, whose players have recently complained about the way the club's management treats them, moved up to 17th place with 25 points and a game in hand, just one point above the relegation zone.
Real Betis reduced the gap with Atlético Madrid to four points with a 2-1 victory over Real Mallorca.
Betis climbed to fifth place with 41 points, four points behind fourth-placed Atlético, while Real Mallorca remained in 18th place with 24 points, still threatened with relegation.
Moroccan Abdel Samad Zalzouli opened the scoring for Betis (18), before Congolese Cedric Bakambu doubled the lead (45+2). In the second half, Mallorca pulled one back through Kosovi Vedat Muriqi (66).