The Toon teenagers conceded twice in the first-half at the Gateshead International Stadium, following Álex Carril's close-range header and Manex Lozano's half-volley, but drew level against the Spanish outfit courtesy of Sean Neave's penalty on the stroke of half-time and Scott Bailey's impressive solo effort after the hour mark.
United's youngsters, though, found themselves behind within a minute of equalising following Peio Huestamendia's strike and, despite the visitors being reduced to ten men after Iker Quintero's red card, the young Magpies were unable to stage a late fightback as they suffered a fourth consecutive loss in the competition's league phase.
Adam Lawrence made four changes from the side which suffered a 5-1 defeat against Benfica last month as 15-year-old goalkeeper Roman Dowell replaced George Mair in-between the sticks, with the latter featuring for England at under-17 level last week, while Joe Brayson, Thomas Old and Matheos Ferreira were all handed starts for the hosts.
Athletic Club created the opening goalscoring opportunity as Elijah Gift latched onto Huestamendia's pass inside the penalty area but directed his attempt wide of the right-hand post.
Dowell, a representative of England at under-17 level, produced an excellent stop shortly after as Huestamendia's deflected cross forced the young 'keeper into quickly retreating towards his own goal before tipping the ball over the crossbar.
Athletic Club, however, scored from the resulting corner in the 30th minute as Carril rose from Oyharcabal's inviting set-piece before heading a firm effort beyond Dowell.
Brayson was unable to draw Newcastle level in swift fashion as the Walker-born striker collected Anthony Munda's pass, after the central midfielder intercepted Garcia's loose pall, but the former drove a low effort wide of the left-hand post.
Athletic Club doubled their advantage in the 42nd minute through Lozano as Dylan Charlton's intended clearance from the left flank was blocked kindly into the striker's path, who fired a clinical half-volley into the left-hand corner.
With the half-time whistle nearing, Newcastle pulled a goal back through Neave's spot-kick. After Ferreira brilliantly evaded the challenge of Iker Quintero along the right wing, the Magpies winger was bundled over inside the penalty area, leaving Neave to dispatch the resulting penalty, sending Garcia the wrong way in the process.
Lozano went close to regaining Athletic Club's two-goal cushion after the restart as the Spanish teenager raced onto Quintero's pass before drilling the ball onto the outside of the left-hand post, with the ball richocheting off the striker for a goal kick.
Dowell carried out an important stop as Quintero's curling effort from the edge of the penalty area forced the 15-year-old shot-stopper into pushing the ball out for a corner.
In the 61st minute, Newcastle equalised through Bailey's impressive finish as the Durham-born teenager won possession from distance and, after completing a mazy run, slotted the ball into the bottom right-hand corner from the edge of the box.
United's youngsters suffered a tough blow a minute later as Huestamendia regained the visitors' advantage, latching onto Oyharcabal's pass before lifting the ball into the roof of the net.
A frantic passage of play followed as Athletic Club were reduced to ten men, with Quintero receiving a second yellow card after bringing down Neave on the right flank.
Leo Shahar was unable to draw Newcastle on level terms as the highly-rated right-back, a representative of England at under-19 level, won the ball in a dangerous position but following a positive run, saw a powerful drive held by Garcia.
Newcastle were fortunate not to concede against the run of play as Oihan Enicnas spotted Dowell off his line but his speculative effort from inside his own half flew narrowly wide of the left-hand post.
With five minutes of stoppage-time awarded, Neave went agonisingly close to netting a late leveller as the 18-year-old forward rose from Seung-soo Park's cross inside the box but the resulting header was parried away by the diving Garcia.
Newcastle United Under-19s: Roman Dowell, Scott Bailey, Dylan Charlton, Anthony Munda, Joe Brayson (Kacey Wooster 61), Leo Shahar (c), Sean Neave, Logan Watts, Seung-soo Park, Matheos Ferreira (Alfie Seldon 61), Thomas Old (Mohamed Waddani 90).
Subs not used: George Mair, Baran Yildiz, Isaac Moran, Guy Bloomer, Jake Durrant, Matty Taylor.
