"We are happy with our performance but not with the result", Madrid coach Zinedine Zidane said.
Real is three points behind Atletico Madrid, which visits Real Sociedad on Thursday, and 15 points behind still unbeaten Barcelona.
Kepa's excellent performance for Athletic came exactly a week after an error from Keylor Navas nearly knocked Real Madrid out of the Champions League, only for Ronaldo to save them once again with a stoppage time penalty against Juventus. Cristiano Ronaldo and Gareth Bale should rotate back in up top having been rested last time out.
Zidane, whose side travel to Germany for the opening leg of their Champions League semi-final against Bayern Munich next week, headed into Wednesday's LaLiga encounter believing his side could yet leapfrog city rivals Atletico.
Real Madrid found it hard to cancel out Inaki Williams's opener, with Kepa producing a large number of saves to deny the hosts again and again. His preserved energy was deemed only valuable enough for 30 minutes off the bench.
"This year our problem in La Liga has been like today", Zidane said.
"What I don't like is they attack me when I play well but don't score", Benzema said.
Pogba challenged by Mourinho after Man Utd derby heroics
The Red Devils were beaten 1-0 by bottom side West Brom at Old Trafford on Sunday, ensuring rivals Manchester City won the title .
Stock to Watch - MGM Resorts International (MGM)
The stock of MGM Resorts International (NYSE: MGM ) has "Overweight" rating given on Friday, February 23 by Barclays Capital. The Perella Weinberg Partners Capital Management Lp holds 117,342 shares with $3.92M value, down from 164,228 last quarter.
European Union short of bargaining chips in negotiations with U.S. on tariffs
The current exemption expires on 1 May. "We expect to be permanently and unconditionally exempted from these measures". So far, the European Union has managed to stay out of the escalating trade tensions between the USA and China.
GK Keylor Navas, 7 - A good early save from Mikel San Jose with his defence looking to the pitch was about the sum of his work, other than rushing out to meet a marauding Williams on the left.
But Zidane, speaking ahead of his side's top-flight clash against Athletic Bilbao tonight, insists he is not at odds with Bale.
Real were let down by their final ball throughout the opening 45 minutes - working good positions easily before becoming frustrated by Athletic's two excellent centre-backs, and the sprightly Kepa in goal.
The defeat left Valencia three points behind Real Madrid. Inigo Cordoba's shot was blocked but when the ball broke to Raul Garcia 12 yards out he really should have scored only to rattle the crossbar.
"If there is one team that can beat Real Madrid, it's Bayern".
Ronaldo then went close again when he shot wide, but the Berbabeu would turn silent in the 14th minute when Inaki Williams collected Cordoba's precise through pass to coolly chip the ball past Navas in the Madrid goal to give Athletic Bilbao the surprise lead.
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