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Flares and fireworks were set off at Melbourne's Federation Square even before the match began at 6am (AEDT) on Sunday.
But the early scenes were nothing compared to when the Socceroos kicked their first and only goal in the 77th minute.
So many flares were set off at Federation Square that the big screen became lost behind thick plumes of red smoke.
Young Australian fan Marco Cannatelli said that goal gave him hope after Argentina scored the first two earlier in the match.
But his heart dropped when the Socceroos failed to equalise in the dying seconds.
"I was more nervous there than I was for my exams," Cannatelli told AAP at Federation Square.
While the Melbourne crowd was disappointed with the loss, fans still applauded the Socceroos' effort and set off more flares and fireworks.
Police were pleased with the behaviour of most fans although two people were arrested for being drunk and a woman sustained minor injuries due to crowding at Federation Square.
Officers also had to use pepper spray before the match started as crowds tried to push their way into the already packed square, a Victoria Police spokesperson told AAP.
Thousands more fans went to Melbourne's AAMI Park and Sydney's Tumbalong Park to watch the World Cup match on big screens.
While the result knocks Australia out of this year's World Cup, fans were already looking ahead to the next one.
"We'll be watching again in four years but I'm very happy with them," Socceroos fan Edwina Acker told AAP.
Reaching the knockout stage for only the second time in Australia's history has put football back on the map, Socceroos fan Khalil Zaydan said.
"I think the important thing about today is you realise how much Australians love this sport," Zaydan told AAP in Melbourne.
"We'll come back in four years and hopefully get a better result."