The 21-year-old Scot was joint favourite with Wales' Tom Haffield going into the event and the top two were guaranteed selection for the Europeans in Budapest in August.
But Smith, who swam for GB at last summer's world championships, could only finish fourth in 4:19.77. England's Roberto Pavoni won in 4:14.55 and his English team mate Joe Roebuck was a surprise second in 4:15.61. Haffield was third.
"I never thought it would just be a two-man race," said Smith. "But I'm now looking forward to the Scottish Commonwealth Games trials in Glasgow in June. That will be my focus."
Edinburgh University's Kerry Buchan had a solid swim in the semi-finals of the 100m breaststroke and qualified for the final in fourth place in 1:10.46. England's Achieng Ajulu-Bushell, who has switched allegiance from Kenya, was fastest in 1:08.84.
Another Edinburgh University swimmer, Iain Macmillan, qualified in ninth place for tonight's final in the 100m butterfly.
Rebecca Adlington failed to hit her form last year, but the double Olympic champion showed she is back focussing on what she does best with a fine victory in her favourite 800m freestyle.
In a class of her own, the world record-holder was around 12 metres ahead by halfway and was swimming solo by the time she touched the wall in 8:21.95, the fastest time in the world this year.