Needing just a draw to reach the quarter-finals, the Australians came unstuck in steamy conditions at Rifu's Miyagi Stadium on Wednesday.
Needing inspiration, Arnold made a double-change at the break with Daniel Arzani and Keanu Baccus thrown on. Arzani tested Egyptian keeper Mohamed Elshenawy early in the second stanza as Australia made a strong start to the half.
The dangerous Arzani again forced Elshenawy into a smart save in the 80th minute and from the resulting corner Thomas Deng's goal-bound header was turned past the post by in-form the Egyptian shotstopper.
The Olyroos were made to rue those saves moments later when Hamdy pounced on a loose ball at the back post to fire the Egyptians into a last-eight showdown with defending Olympic champions Brazil.
Despite the exit, Arnold said there were plenty of positives for his team to take away from the tournament including their famous opening 2-0 win over Argentina.
"These boys will go home with the fantastic memories of beating Argentina, and really pushing Spain the whole way. Did those two games take it out of us? Maybe, but I couldn't be prouder," Arnold said.
"In the past the Olympics has developed and created a lot of national team players for the Soccceroos ... I do feel that I walk away from here with much more depth now for the Socceroos."