England were beaten 52-47 by Australia in the Quad Series in their first meeting since the Commonwealth Games final.
The Roses won a shock gold on the Gold Coast against the defending champions and overwhelming favourites in April.
England looked set to triumph again after dominating the opening quarter in New South Wales, but Australia wrestled control back for the next two periods.
A late Roses comeback was not enough and Australia held on for the win.
“They stepped up defensively and we knew they would,” said England centre Serena Guthrie.
“We’re in enemy territory and we didn’t quite execute the game plan like we did when we last played them.”
England were without injured shooter Jo Harten in Newcastle and coach Tracey Neville experimented with a number of new player combinations, but they could not stop the Diamonds once they found their fluidity.
Guthrie added: “We’re always going to miss Jo Harten in the shooting circle. We’ve got so many new combinations going on and I think we’ve done all right.
“Of course we’re disappointed with the result tonight.”
England had won their opening game of the round-robin tournament on Saturday, defeating New Zealand 52-39.
They are now third in the standings and play South Africa in their final game on Sunday in Melbourne, while unbeaten leaders Australia face second-placed New Zealand the same day.