Two scrappy goals from Mark Bridge and John Aloisi earned the three points for the visitors in front of a crowd of over 31,000 at Telstra Dome.
Merrick, usually reluctant to criticise his players, admitted Sydney were "the better team on the night" and branded his team's first-half marking of Steve Corica as "disgraceful".
"We were second best for the entire game," said Merrick. "We couldn't get going the slick passing movements that we're become known for."
Merrick accepted they missed Australia striker Archie Thompson, who was suspended for the big match: "We didn't test their goalkeeper. Hardly created any chances."
Skipper Muscat pulled no punches in his assessment.
"We're under no illusions. Every part of the game was unacceptable. We have no excuses, the performance wasn't good enough."