Trailing 1-0 from the first leg, Madrid got a flying start when Cristiano Ronaldo put them ahead in just the sixth minute of Wednesday night's return clash at the Bernabeu and the Primera Division leaders might have had the tie sewn up by half-time after dominating the opening 45 minutes.
However, a much-improved Lyon turned things around in the second half and deservedly drew level on the night through Miralem Pjanic's 75th-minute strike.
That proved enough for Lyon to seal a 2-1 aggregate victory and send big-spending Madrid tumbling out of the competition at the last-16 stage for the sixth successive season.
It also ended their dreams of winning a 10th European Cup crown at their Bernabeu home, where this year's final will be held.
Madrid-based Marca, the biggest-selling daily in Spain, believe the exit will cost Real coach Manuel Pellegrini his job, with their front page announcing: "OUT. Goodbye Champions, Goodbye Pellegrini."
It continued inside: "The same upset as every year. The Whites fall after failing to take excellent chances in the first half. Lyon's changes at half-time changed the match. (Gonzalo) Higuain maintained his bad luck in Europe and Kaka didn't get going.
"Madrid again go crashing against the curse of the last 16. Lyon join Juventus, Arsenal, Bayern Munich, Roma and Liverpool in the list of executioners."
Rival Madrid daily AS's front page read: "Catastrophe. Madrid couldn't overcome Lyon not even in the Bernabeu."
Inside the paper discussed how the "failure" and "nightmare" continues for Madrid and how Lyon deserved to go through.
El Pais newspaper made reference to the huge amounts of money that Madrid spent last summer following the return of Florentino Perez to the club presidency.
In a bid to take Madrid back to the top of the domestic and European game, the nine-time European champions spent in the region of 250million euros on new players - including a world-record 94million euros on Ronaldo.
El Pais's headline read: "Football has no price."
It continued: "Lyon question the realism of the mega-project of Florentino Perez and Madrid, who ran out of steam in the second half, fell for the sixth successive season in the last-16.
"Titles are not bought, they are won."
Barcelona-based sports dailies El Mundo Deportivo and Sport, meanwhile, both went with a huge "KO" on their front pages.
El Mundo Deportivo also twisted the knife by highlighting the possibility of Madrid's arch rivals Barca defending their European crown at the Bernabeu in May.
"Madrid will not be in the Bernabeu final! Failure of Florentino's project, incapable of overcoming the last-16 of the Champions League for the sixth successive year," the paper continued.
"Barca's dream of winning their fourth European Cup in Chamartin (Bernabeu) grows."
Sport added on their front page: "The great failure", whilst underneath showing the pictures of Perez, Pellegrini, Ronaldo and Kaka with captions alongside them.
The captions read: "'Florentino, broken. 300million thrown away'. 'Pellegrini, sentenced. The Bernabeu calls for his head'. 'Cristiano, humiliated. He promised every title and has already lost two'. 'Kaka, the next problem. He left the pitch insulting the coach'."
Inside, Sport added: "Galactic humiliation", referring to the 'Galacticos' term given to Perez's star-studded and expensively-assembled squads of now and during his pervious time as president between 2000-2006.
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