The 34-year-old came up agonisingly short as Kwiatkowski became Poland's first ever road world champion.
Gerrans edged out Alejandro Valverde of hosts Spain for the silver medal in a six-man sprint behind the breakaway winner.
"I felt like I wanted to cry when I crossed the finishing line. To be so close to the world title and see it slip away in the final kilometres," said the Orica-GreenEDGE rider.
"Coming to the finish with a small group racing for second place, I knew I had good legs and if the thing had unfolded differently in the final, I'd have been racing for victory.
"I'm a little disappointed but at the same time really happy with the way I raced.
"I had fantastic support from my Aussie teammates so I couldn't have asked for a lot more at the end of the day."
Gerrans admitted he hadn't seen Kwiatkowski slip off the front of the peloton with 8km left on the penultimate descent, but he said he could have no qualms about his own race.
"I haven't got too many regrets with the way I raced. I was just beaten by a stronger rider with better tactics," he said.
"Michal's definitely a worthy winner. Overall I can look back at the race and be happy with what I was able to achieve.
"I'm happy with the way I raced but always to come second in a big race like this, particularly the World Championships, is disappointing in one respect as well."
While disappointed at missing out on gold, Australia head coach Brad McGee said he was still happy with the outcome.
"We're crying and smiling at the same time," said McGee. "How could you not be proud of Simon and all the efforts today.
"They did everything needed to win but were out-jumped by a superb performance from Kwiatkowski.
"You can't be disappointed, but again the victory was right there in front of us."
Australia's second option Michael Matthews was hovering only a handful of seconds behind the Gerrans group cresting the final climb but said the plan was for him to stay with the sprinters in case the race regrouped in Ponferrada.
"For me I was hoping it would come back together and I could go for the sprint," said Matthews.
"But in the end one guy stayed away and Gerro got the best place possible. It was a really good ride from the whole team. We all did our job."
Gerrans has had his best-ever season in 2014. He started winning in January taking the Australian national championships for the second time and overall victory at the Tour Down Under for the third time.
In April he won Liege-Bastogne-Liege which was his second classic after 2012's Milan-San Remo. Earlier this month picked up back-to-back Canadian Grand Prix wins which marked him as a world championships favourite.
Former champion Cadel Evans didn't finish his final worlds on Sunday retiring on the penultimate lap.
Australia ended the championships with more medals than any other country taking two gold, two silver and two bronze.
Trade outfits Orica-GreenEDGE and Orica-AIS also won silver in the men's and women's team time trials, respectively.
Australian medals at tne UCI Road World Championships.
Campbell Flakemore - Men's under 23 individual time trial
Macey Stewart - Women's junior individual time trial
Simon Gerrans - Men's elite road race
Caleb Ewan - Men's under 23 road race
Orica-GreenEDGE - Men's team time trial*
Orica-AIS - Women's team time trial*
Anna-Leeza Hull - Women's junior individual time trial
Michael Storer - Men's junior individual time trial
*Team time trials are raced by trade outfits not countries. Orica-GreenEDGE and Orica-AIS are Australian-registered teams.