The teams were level at 6-6 deep into the extra end as British skip Eve Muirhead prepared to unleash her team's final stone -- Sweden having the hammer.
Just after letting go, the vastly experienced Muirhead, stood up and exclaimed, pointing to the red light that had illuminated on the stone.
This happens normally for a "hogline violation", where the curler does not let go of the stone before the cut-off hogline, or for a "double touch" where the thrower re-touches the handle after letting go over the line.
Television replays appeared to show that Muirhead had let go in plenty of time and had not "double-touched" but the sport's rules do not allow for the use of replays. Instead a match official tested the stone against the hogline and found it not to be faulty so Muirhead's final effort was discounted and she was not allowed another attempt.
Sweden's skip then took her simple last shot to secure an 8-6 win that keeps them firmly on course to be top seeds for the semi-finals. Sweden won the event in 2006 and 2010 but lost to Canada in the final in 2014.
Sochi bronze medallists and 2002 champions Britain, with three wins and three defeats, have work to do to make the last four.
Muirhead, a former world and European champion leading Britain in the Olympics for the third time, said it was "gutting" to lose in such a way.
"I guess when you see the replays and it looked like it was let go before -- it was hard to take," she said.
"It was the first stone I've probably ever hogged in my life. There's nothing we can do. We have to move on."
Asked if she thought it had crossed the line, she said: "I don't know. If I did, I'd be out there telling them.
"When something like that happens, it makes it very tough to take and it's gutting it finished that way."
The incident left lots of people shaking their heads at the rink where almost no information is conveyed to fans, but World Curling Federation (WCF) spokesperson Cameron MacAllister was unable to shed any further light on it other than reiterating the rules.
"When Eve delivered her last stone the lights went red that suggests a hogline violation and if you have a hogline violation the stone is removed from play," he told Reuters.
"When the stone went red there was a question of what the situation was and the ice maker came out to test the stone and when he tested it over the hogline it was working fine so the stone was taken out of play."
(Additional reporting by Steve Keating; Editing by Clare Fallon)
