Palace looked like they were heading for safety after their win at Chelsea on Saturday but this defeat leaves them three points above the relegation zone after Hull beat Middlesbrough.
The Eagles have a game in hand on the teams below them but this was a disappointing night for Sam Allardyce and his side as their run of four straight wins ended.
Palace went ahead in the first half through Christian Benteke but Nathan Redmond equalised for Southampton on the stroke of half time.
Palace looked to be heading for a valuable point in their battle for safety but late goals from Maya Yoshida and James Ward-Prowse gave Southampton victory.
Allardyce had said it would be difficult for Palace to follow up their win against Chelsea but his side went ahead on 31 minutes when Benteke finished off a brilliant team move.
Wilfried Zaha moved the ball inside from the left, Jason Puncheon then fed Andros Townsend on the right of the penalty area and he crossed for Benteke to stab home from a yard. It was a wonderfully worked goal.
Southampton had two big penalty appeals towards the end of the first half - first when Jeffrey Schlupp handled inside the area and then when Shane Long went down under challenge from Luka Milivojevic - but the home side levelled with the last action of the first half.
There was some controversy about the goal and Palace were furious with referee Roger East
Zaha appeared to be barged over by Ward-Prowse on the touchline but East waved play on and Ward-Prowse crossed for Redmond to score from 12 yards.
It was the last action of the first half and an incensed Zaha had to be restrained by team-mates as the teams went down the tunnel.
The game looked to be heading for a draw in the second half but Southampton won it late on.
Yoshida scored six minutes from time and Ward-Prowse sealed the win a minute later.