The former Lib Dem leader and one-time deputy prime minister lost to Labour candidate Jared O’Mara by 2,125 votes.
He put concerns over the “excruciating task” of negotiating Brexit at the heart of his concession speech, an issue he had fought hard over as party Brexit spokesman, and shaped by his experience as an MEP and EU trade negotiator.
Responding to the result, he said: “We saw that in the Brexit referendum last year and we see it here again tonight, polarised between left and right, between different regions and nations and areas of the country, but most gravely of all, this huge gulf now between young and old.
“My only plea would be to all MPs, including Jared, from all parties, is this, that we will not pick our way through the very difficult times that our country faces if in the next parliament MPs of all parties simply seek to amplify what divides them.”
Mr Clegg’s defeat was the first of two Lib Dem losses in Yorkshire, with Greg Mulholland’s losing out to Labour’s Alex Sobel in Leeds North West.
It came as the party was celebrating gains in London, with former heavyweights Vince Cable and Ed Davey winning back their Twickenham and Kingston seats.
Sheffield Hallam was widely regarded as a safe seat for the Lib Dems, who on Wednesday were claiming they would double their numbers.
A visibly upset Mr Clegg last night congratulated Mr O’Mara on a “spectacular victory”, adding that representing the constituency had been “the greatest privilege” of his political life.
“In my time in Parliament, I have never shirked from political battles. I have never retreated from the political battlefield. I have always sought to stand by the liberal values I believe in,” he said.
“But I have, of course, encountered this evening something that many people have encountered before me tonight... you live by the sword, you die by the sword.”
Mr Clegg’s fall from high office to being out of office has taken little more than two years, with election defeat a far cry from the highs of the coalition. As party leader, Mr Clegg led the Lib Dems into Government after striking a coalition deal with David Cameron’s Conservatives in 2010.
Life in Government proved far from easy. Mr Clegg became deputy prime minister and argued the Lib Dems had to play a role in creating a stable administration capable of dealing with the aftermath of the financial crisis. But they abandoned promises to oppose tuition fee increases, a move viewed as a betrayal many voters could not forgive.
He took time away from the frontline of British politics after his party suffered heavy losses at the 2015 general election, with questions raised about whether he would stay on as MP for Sheffield Hallam.
But in July 2016 the former deputy prime minister was appointed Brexit spokesman for the party, something he seemed qualified for given his experiences as an MEP and EU trade negotiator. This led to him taking a prominent role in the 2017 election, castigating May and Corbyn for “colluding” to form a “pact of silence” to avoid discussing Brexit.