The duo had led the competition at the halfway mark but despite being roared on by a vocal home support that included Prime Minister David Cameron, they faded thereafter.
A pair of errors, most notably on their reverse three-and-a-half somersaults dive which dropped them out of the podium places, cost them dear as teenage Chinese pairing Cao Yuan and Zhang Yanquan claimed victory.
Mexico's German Sanchez and Ivan Garcia Navarro took silver ahead of Nick McCrory and David Boudia of the United States who, with an 8.82 points gap over Daley and Waterfield, were comfortably clear in bronze.
The British pair had initially looked on course to snatch the first home gold medal of these Olympics when they led the Chinese after three dives.
After a near-perfect compulsory set of dives Daley attracted a perfect 10, with Waterfield not far behind, for their back three-and-a-half somersaults to leave them 2.4 points clear at the top.
Inevitably the response of the Chinese, still unbeaten in international competition during their young careers, was to post 10s on their next dive and when both Daley and Waterfield then missed their entries they had suddenly slipped to fourth.
It drew an audible groan inside the Aquatics Centre and while they produced a solid forward four-and-a-half somersaults - their hardest dive - next up they had left themselves with too much work to do.
"The last two dives were brilliant but it's just not enough on the day it just wasn't meant to be," Daley told the BBC.
"It started off really well. We got a PB in the first two. The third dive was really good. It was just our fourth dive. If you miss one dive like that and you're gone. It is the way sport goes It's annoying but what can you do."
The result means Daley will now have to wait until the individual platform on the penultimate day of the Games to claim an Olympic medal - the only honour to have eluded him so far in his career.
The 18-year-old will leave the Olympic Village and return to a training base in Southend for six days in preparation for his anticipated clash with China's world champion Bo Qiu.
Daley memorably beat Bo to win the world platform title as a 15-year-old in Rome, but the Chinese has proved unbeatable since.
Where Bo has been unconquerable, Daley and Waterfield had targeted the teenage pairing of Cao, 17, and Zhang, 18, today in their first major competition.
But the teenage duo proved nerveless as they weathered the early storm, and crowd support, from the Britons before keeping China on course for a clean sweep of all eight gold medals in the diving pool.
Team GB supporters said they were "gutted" that Daley and Waterfield failed to get medals in the diving final.
Council worker Andy Jennings, 44, from Birmingham, said: "I'm absolutely gutted. It was so exciting in the first three rounds, and then, oh what a shame. We really thought there was going to be a gold, we had such high expectations."
But he added that watching the pair in the synchronised 10m platform final had been an "amazing" experience.
"We still love them both," he added.
Website manager Barry Wade, 44, from Nottingham, said: "I think the guys did a really good job. They work really hard and they gave it their best shot.
"They were doing so well at first but then there were a couple of errors where they slipped up.
"At the end of the day we came here to see a couple of guys give it their all and that's what we've seen so I'm still happy."
Spectator Danny Osborne, 24, said he knew both Daley and Waterfield and thought they would be finding their position hard.
He said: "Fourth's the hardest place to come mentally. They came so close but didn't get to stand on the podium, so that's really tough to deal with.
"It's a real shame they didn't medal, because they did so well.
"The standard was just really high.
"I used to dive myself and the Mexicans did some dives that I've never seen before. It was a surprise to see them in the top three."
Mr Osborne, a fitness trainer from Beckenham, south London, said it was "annoying" that Daley gets so much more attention than Waterfield.
He said: "Pete's been doing this for years." But he added that despite the result he had still enjoyed the "electric" atmosphere of the final.