McNamara's men led 10-0 following tries in the first 20 minutes from wing Ryan Hall and centre Leroy Cudjoe, but the Kangaroos hit back with five touchdowns and four Jonathan Thurston goals.
The defeat means England are now likely to face highly-fancied New Zealand in the semi-finals, considerably increasing their degree of difficulty in the quest to be crowned world champions.
"We are frustrated," McNamara said at his post-match press conference.
"We started the game superbly and played with some great energy with the ball, but we gifted a lot of possession to the opposition and gave a lot of penalties away.
"We were sat there thinking and wondering what could have been and what maybe should have been if we had been a little bit cleaner in those areas.
"We know how good Australia are, and we knew we had to be at our best, or near our best, to win that game. We just fell a little bit short.
"At the start of the second-half, when they (Australia) scored three minutes in, the boys showed tremendous courage to defend the try-line, go to the other end and go to within six points again with less than 20 minutes to go.
"We got a lot of positives from it, but there is a real sense of frustration that we didn't quite go on and finish the job off."
England had endured a fractured World Cup preparation period, losing a warm-up game to Italy while McNamara found himself dealing with off-field distractions.
That culminated in the expulsion of second-row forward Gareth Hock and the non-selection of prop James Graham for the clash with Australia. Speculation surrounded Graham in that he had been punished for taking part in a drinking session following the Italy defeat.
McNamara, though, talked up his players after they produced a battling display in the eagerly-awaited World Cup clash.
"I've always thought we have a team that is capable of potentially winning this competition if it concentrates and plays to its best, and it has to do that in every game," he added.
"We were a bit off today. We gave far too many penalties away and gave up some field position quite easily, but every time we got to the right end of the field we seemed to trouble Australia.
"We just never gave ourselves anough chances to be at the right end of the field. In terms of being at our best, we weren't quite there."
England captain Kevin Sinfield vowed that his team would bounce back, starting with next Saturday's clash against Ireland.
"The group we have got is going to get better, a whole lot better," the Leeds Rhinos star said.
"We have a strong squad, and if we are good enough over the next couple of weeks, hopefully we will get another shot at Australia.
"Whichever route we go on in this tournament there are going to be obstacles in our way. We are ready to roll our sleeves up and work as hard as we can, and hopefully get the result next week.
"We've got a fantastic group, not only the players, but the staff. We have worked very hard for this. We have been beaten today, but we certainly won't throw the towel in.
"There are some tough games in front of us, but we are ready to rip into training again and make sure we turn up again next Saturday."