Nominated for her role as a struggling mother in the indie film If I had Legs I'd Kick You, Byrne lost to Jessie Buckley for her portrayal of playwright William Shakespeare's wife in Hamnet at the awards ceremony, held at Hollywood's Dolby Theatre on Monday.
Sydney-born Byrne had been touted as a favourite in a strong field that included Kate Hudson, Renate Reinsve and Emma Stone, after claiming the best actress prize at four key pre-Oscars events, including the Golden Globes.
Nicole Kidman and Cate Blanchett are the only Australians to have won Oscars in the coveted best actress category.
Byrne, one of many celebrities who stunned on the red carpet, arrived for cinema's night of nights in a timeless custom black Dior gown embroidered with colourful beaded flowers.
Another Australian, Queenslander Jacob Elordi, nominated in the best supporting actor category for playing the creature in Frankenstein, was beaten by Sean Penn who won his third Oscar for his role as a racist soldier in One Battle After Another.
Australian musician Nick Cave, nominated for best original song on Train Dreams, which stars Australian actor Joel Edgerton, lost to the song Golden featured on KPop Demon Hunters.
Costume and production designer Fiona Crombie was another Australian to go home empty-handed, denied in the best production design category for her work on Hamnet, and losing out to Frankenstein.
One Battle After Another, the sweeping Paul Thomas Anderson-helmed comic political drama, starring Leonardo DiCaprio, was the night's big winner, claiming six golden statuettes, including best picture, best director, and best adapted screenplay.
In other major categories, best actor went to Michael B Jordan for his dual role as twins in Sinners, which won four Oscars, while Amy Madigan prevailed in the best supporting actress category for her work as a witch in the horror film Weapons.
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