Madrid now trail leaders Barcelona and Atletico Madrid by five points after failing to respond to Roberto Soldado's eighth minute winner against his old side.
After being outplayed before the break, Benitez's men looked like a different side after half-time as they carved out a series of chances to turn the game on its head.
However, days after being indefinitely banned from representing France for his part in alleged blackmail attempt on international teammate Mathieu Valbuena, Karim Benzema wasted a hat-trick of glorious chances, whilst Cristiano Ronaldo was largely anonymous as the pressure mounted on Benitez.
Real Madrid beaten again at Villarreal, Atletico joint top
"It is difficult to explain because it is clear in the first-half we didn't play well and I expected the team we saw in the second-half, albeit we lacked precision," said Benitez.
Madrid missed a huge chance to close the gap at the top after Barca had surprisingly dropped two points at home to Deportivo la Coruna on Saturday after blowing a two-goal lead in the final 15 minutes.
Benitez refused to admit defeat in the title race with 23 matches still to go, but acknowledged his star-studded squad couldn't afford to pass up many more opportunities on the rare occasions Barca slip-up.
"I insist this is a league in which all the teams will lose points," he added.
La Liga battle heats up as Barca drop points
"The important thing is to face the games like we did in the second-half, that will allow us to have more guarantees and win games.
"I am not happy at all with the first-half and I think the reaction in the second-half is the route we have to follow. Unfortunately, today it has cost us three points.
"Evidently we know that to fight for the league we have to win a lot of games. These games, with a favourable situation before the match, are the games where we really need to show that we are going for the league."
Madrid had seemed to be back on track after their 4-0 humiliation at the hands of Barcelona last month having strung together five consecutive wins before travelling to El Madrigal, including a record 8-0 thrashing of Malmo in the Champions League on Tuesday.
However, defender Pepe questioned the spirit of his teammates as Villarreal pounced on a incredibly lame start by the 10-time European champions.
"We weren't switched on from the beginning. We know Villarreal would make it difficult and to win games we need to start brighter and with more determination," said the Portuguese international.
"We need to fix this and speak to one another. I don't know the reason why we started the first-half without much spirit in the team."
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