Martinez (14-3) was knocked out in the second round by Russian Shahbulat Shamhalaev (12-1-1).
The two battled in a close first round with Shamhalaev knocking Martinez down early in the round before Martinez used his wrestling to take Shamhalaev down with 1:45 left in the first round.
Martinez finished the round in dominant position, and appeared to secure a 10-9 round.
But in the second round, Shamhalaev wobbled Martinez with a head kick. Martinez hopped up to his feet, but was hit by big knees from Shamhalaev before hitting the canvas again.
Martinez got up one more time, clearly dazed, and Shamhalaev sent him down a final time with a big overhand right before piling on two hammer fists as the referee stopped the fight.
Shamhalaev earned a Bellator MMA featherweight title shot with the win and $100,000 for winning the tournament.