Smith fell just short in the World Championships back in January, when he lost 7-5 to Peter Wright.
But after toppling Gerwyn Price in the quarter-finals and youngster Keane Barry in the semi-finals, Smith looked set to land the biggest title of his career.
Up against Dutchman Danny Noppert, Smith was considered favourite and he performed well, eventually finding himself 10-9 up and one leg away from securing the trophy.
But the 31-year-old Noppert battled back as Smith struggled with his doubles. At 10-9, Smith missed a match dart at the bullseye for a 124 checkout, and Noppert swiftly punished the mistake, checking out with a double four.
With the score then levelled at a climactic 10-10, the Dutchman needed to break Smith's throw, and he managed to do so, firing in a 180 on his first effort before winning the title with a 13-dart leg.
Noppert's win sees him rise to 12th on the PDC Order of Merit, and pocket £100,000 in prize money.
Following the match, Noppert was delighted with his performance and was looking to build on his title win and "take big steps forward".
"I am over the moon, this is a special moment for me," said Noppert, who earlier defeated Damon Heta and William O'Connor in the quarter-finals and semi-finals respectively.
"I can't believe it; I have said before that I want to lift a trophy but I never thought it would be at such a big tournament like the UK Open.
"It was a hard game at the end of a long day, we both wanted to lift this trophy so much and neither of us played like we can.
"I think I can take big steps forward in my career now."
Meanwhile, a dejected Smith blamed himself for his eighth successive final loss in just four years.
Having finished runner-up again, he did rise to No.4 in the PDC Order of Merit, but that all-important title still eludes him.
"I was trying too hard to win, fair play to Danny," said Smith. "It's yet another final loss, it's very hard to take.
"I can only blame myself, my doubles were awful and my scoring was bad."