Catching Red Bull in short term an illusion, Mercedes boss Toto Wolff concedes
Hamilton was eliminated in Q2 to qualify 11th, his worst result at Albert Park since 2010, while George Russell qualified seventh for Sunday's race as the team's hopes of rebounding in Melbourne suffered a major blow.
Russell's fastest lap in Q3 was a gaping eight-tenths of a second shy of Red Bull driver Max Verstappen's best, the Dutchman taking his third pole of the season and fourth in succession.
Briton Hamilton said there was a shopping list of problems with his car, while Wolff gave a gloomy assessment of their situation.
"I think we have a car that's difficult and you can be narrowly in and out of the window," said Wolff.
"It's the whole interaction of aerodynamics and mechanical and the tyres. It's never a single topic. But we are going to just keep our heads down and push through this.
"I think it's an illusion to go closer to Red Bull in the short term but I still have to believe that there is more in this car."
The day had started brightly for Mercedes, with Hamilton fourth quickest, and within a 10th of a second of Ferrari's pace-setter Charles Leclerc, in the final practice session (P3). But the bubble burst in qualifying.
Hamilton said his car's inconsistency "messes with the mind".
"I think our car is on a bit of a knife edge," he added.
"This morning was nice with a calmer wind and then as soon as the wind picks up it gets a little bit less stable.
"I'm not sure why but it didn't feel the same in qualifying even though we had lighter fuel. It felt better in P3 so it's not a great feeling."
Russell was happier with his car but gave a dim preview of Mercedes' chances on Sunday.
"We will be in a much better place tomorrow when we have more fuel in the car and the pace is a little slower from everybody," he said.
"But this circuit is not playing to our strengths."