Friday night's result sees a stumbling World Cup qualifying campaign slump to a new low following last month's humiliating 3-2 loss to minnows Luxembourg.
Michael O'Neill's side enjoyed the best of a goalless first half before Rufat Dadasov scored the opener for the hosts on 58 minutes.
Mahir Shukurov added a second in injury time a short time after NI were reduced to 10 men, as defender Jonny Evans received a red card.
He will now be absent, alongside defensive partner Gareth McAuley and midfielder Oliver Norwood, for Tuesday's final Group F game in Israel.
Speaking to the press after the final whistle, O'Neill raised concerns about his opponent's perceived time-wasting - even claiming Azerbaijan boss Berti Vogts apologised for it, while the German denied it.
The NI manager said: "Berti Vogts apologised to me at the end for the behaviour of his players - as he did in Belfast.
"I thought the referee should have been stronger. Azerbaijan players went down with every challenge and always tried to stop the game."
Vogts, who was "very, very happy" with how his side performed, said: "No, of course I did not apologise, I said 'good luck in Israel'. Why would I apologise?"
For a team like us, who who have committed virtually the fewest fouls in Europe, to have the disciplinary record we have is a bit of a joke.
O'Neill had opted for a change in strategy after the Luxembourg defeat, with a 3-5-2 formation on the team sheet for the first time in his reign.
There were early nerves and early chances at the Bakcell Arena.
Lee Hodson broke down the right channel to cross to Jamie Ward, but the diminutive winger failed to convert and give the visitors the lead - while Norwood and Chris Brunt, back after suspension, were both guilty of hit-and-hope balls up the field in the opening stages.
Ward's movement was good and further opportunities followed, the best of which coming from a Martin Paterson cross from the edge of the penalty box.
The ball found Ward in the centre of goal but his close-range header was knocked back by keeper Kamran Agayev - who knew little about it.
Azerbaijan were a better side in the second period as they made an energetic start in front of a home crowd, hustling in the midfield and pressing up when not in possession.
Only a poor finish from Dadasov denied them a goal within five minutes of the restart.
He made amends a short time later when a free kick was conceded by Norwood, sweeping the ball into the net to give Azerbaijan the lead and send the crowd wild.
Northern Ireland looked sluggish as their opponents increasingly controlled play down the right flank and constantly threatened to double their lead.
Paterson belted the upright with two minutes to go but there was much worse to come.
Evans cut through the back of Rauf Aliyev in injury-time and was instantly sent off, before Shukurov slotted the free-kick into the top corner to add the final insult.
"Jonny has admitted it was frustration so that was stupid for a player of his level and the level he plays at with Manchester United. He should know better," said O'Neill.
"You could see frustration creeping into the players as the game went on, not only towards the opposition but also to the referee.
"We have to learn to control that. And as for Gareth, anything for dissent is inexcusable, simple as that."