The under-19s went down 3-1, although appeared to be heading for another impressive victory when striker Greg Pearson opened the scoring after just 10 minutes, stabbing home a Billy Mehmet nod down in the six yard box.
The Hammers then dominated for most of the first half without adding to their tally, but were made to pay just before the break, conceding two disappointing goals within the space of five minutes.
First Darren Blewitt was penalised for a reckless foul in the penalty area, giving the Cottagers the chance to level from the spot, and then Trent McClenahan slipped to allow his marker in for an immediate second.
After losing Graeme Carrick and Pearson with injuries before half-time aswell, things weren't looking good for Tony Carr's men, and indeed got worse soon after the interval, when Fulham added their third from a corner that was again poorly defended.
Hammers fought back bravely but couldn't find the goal to inspire a comeback, and now enter the three-week Christmas break with both the Cottagers and Southampton snapping at their heels at the top of the Group C table.
Said Tony Carr afterwards: "It was disappointing to lose the game after starting so well and scoring an early goal, but I have no real complaints with the result in the end.
"All three of their goals came from our poor defending, but we did have a young back four out there, with two first-year central defenders, and they have done really well in recent weeks, so I am not going to be too critical.
"Fulham were a lot stronger than us - nine of their players were third year scholars - and they just had a bit too much for us on the day.
"It would have been nice to go into the Christmas break with a good result under our belts, but we will work hard to maintain our lead at the top of the table in the new year and I am sure the boys will bounce back from this."
Team: Jackson, McClenahan (Khan 33), Tattam, Laws, Blewitt, Lumsden, Gordon, Carrick (Cole 30), Mehmet, Pearson (Eastwood 35), McMahon.
Meanwhile, the under-17s were beaten 2-0 by the Cottagers to round off a disappointing morning for the Academy.
After a fairly even start, the game swung in Fulham's favour just before half-time, when Hammers lost possession in dangerous areas twice and were made to pay on both occasions.
Despite creating a couple of decent chances, we failed to find a breakthrough in the second half and Kevin Keen was left to reflect on a frustrating performance.
"I'm very disappointed," he said afterwards, "because that was our last game before the Christmas break and it was probably our worst display of the season.
"I told the players before the game to give it a real go and make sure we wouldn't be thinking about a disappointing defeat all over Christmas, but sadly that is the case.
"The two goals were both gifted to Fulham when we gave the ball away, and we didn't play well enough in the second half to get back into it.
"The boys showed plenty of determination and effort, but it just didn't click for us on the day."
Team: Behcet, Wright, Henry, Parrington, Bunce, Yao, Noble, Shaw, Cohen, Collington (Stokes 65), Lee (Singh 65). Subs unused: Reed, Craig, Ketchell.