Augsburg forward Ji Dong-won scored twice to give champions Bayern Munich the chance to draw level at the top.
Dortmund, whose captain and top scorer Marco Reus returned after a month out through injury, are on 54 points, three ahead of Bayern.
The Bavarians travel to Borussia Moenchengladbach on Saturday.
Dortmund had led the standings by seven points.
Their second league loss of the season came before next week’s Champions League round of 16 second leg against Tottenham Hotspur following their 3-0 defeat in London last month.
The Ruhr valley club, who beat Bayer Leverkusen last week to end a five-game winless run in all competitions, struggled to reach the Augsburg box and the hard-working hosts took control.
South Korea international Ji stunned the visitors in the 24th minute when he shook off two defenders to fire in from close range.
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Dortmund, who had two chances late in the first half, were toothless for much of the second period.
They went 2-0 down when Ji beautifully chipped the ball past keeper Roman Buerki in the 68th minute.
Dortmund substitute Paco Alcacer notched his 13th league goal in the 81st to cut the deficit but despite late pressure they could not find an equaliser.
Fifteenth-placed Augsburg held firm to move further away from the relegation zone.
NAN
