The Swans were dreaming of a last eight Carling Cup date with one of the Premier League big boys but they wasted their best chance of making history at The Liberty Stadium.
Lee Williamson's 21st minute winner punished a lacklustre Swansea side that has impressed in their first season in the Championship for 24 years.
And Martinez said: "The defeat is very frustrating but we must keep learning.
"We need to be perfect to win football matches so tests like show me a lot, we must look to improve.
"Our performance against Watford was nowhere near what we expect by our standards and that has been reflected in the score-line here.
Jordi Gomez was the closest an off-colour Swansea came to rescuing their cup dreams when the Spanish striker hit the post in the final five minutes.
Martinez concluded: "It is a missed opportunity for us to qualify for the quarter-finals but we will react, get better and get stronger for the next challenge."
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