Emma Raducanu had opened the clash up with a straight sets win against Viktoria Hruncakova, but Katie Boulter then lost to Rebecca Sramkova 2-6 6-4 6-4.
That meant for the first time in the tournament the British doubles selection was called into action.
Watson and Nicholls lost 6-2 6-2 to Hruncakova and Tereza Mihalikova.
“Right now it is difficult because I really thought we could do it as a team,” said captain Anne Keothavong.
“I have to maintain positivity for myself and team and find a way to pick everyone up. We’re all absolutely gutted.
“I’m so proud of this team. We still reached the semi-finals and that’s a fantastic achievement.”
Her team would have been only the fifth British side to contest the final in its 61-year history.