It's the second defeat of the Tour for Warren Gatland's side
The Lions have suffered their second defeat in three matches, after losing 23-22 to the Highlanders in New Zealand.
Scoring three tries on tour for the first time, the Lions attacking threat was not enough to beat their hosts, who won the game with a penalty in the final five minutes.
It was the Highlanders who took the lead in Dunedin, after imposing themselves from the off. After trading penalties in the opening ten minutes, All Black Waisake Naholo scored from close range to give the home team a 10-3 lead.
England centre Jonathan Joseph responded before half-time after good play from CJ Stander and Dan Biggar put Joseph through to score his first try on tour. The teams were level at 10-10 at the break.
The Lions started the second-half excellently, scoring their second try inside three minutes of the whistle. Winger Tommy Seymour intercepted a cross-field kick and ran towards the corner to score his first try in Lions colours.
Captain Sam Warburton increased the Lions lead to 20-13 with over twenty minutes left, as the Lions looked on course for their first back-to-back wins on tour. That lead was increased 22-13 with Biggar's conversion.
Playing on front of their raucous home fans, the Highlanders dominated the final quarter of the game, with a converted try from hooker Liam Coltman, and a Marty Banks penalty for a famous win.
The Lions have now lost their two midweek matches on tour, as the Test team continues to take shape ahead of Saturday week's opening game with New Zealand.
"We didn’t nail a few big moments that were pretty important to us, we got ourselves reasonably comfortable at 22-13 to be in control of the game and unfortunately we let them back into it, so that’s disappointing", head coach Warren Gatland said after the game.
The Lions now move on to Saturday's game against the New Zealand Maori, which is being dubbed as the "unofficial Fourth Test".