In his 13th paid fight, Campbell, who won gold at London 2012, was floored by a short left hook in the fifth round.
The Hull lightweight, 28, never really recovered his poise and Mendy was deservedly awarded the fight on a split decision - 115-112, 115-113, 113-115.
Campbell had been expected to make the move to world level in 2016.
"I feel as though I won the fight but I'm not one of the judges," said Campbell. "I was catching him a lot to the head and body.
"It was a good lesson. I showed a lot in there. I'm a perfectionist and want to go back to the gym and work even harder.
"There are no excuses. That's the first time I've done 12 rounds in my career - I feel as though I made a few mistakes in there."
Since turning pro in 2013, Campbell's progress had been serene, the classy southpaw racking up 10 knockouts in 12 encounters.
His first real test was against Tommy Coyle in August, which Campbell passed with flying colours, stopping his fellow Hull man in 10 rounds.
But Campbell did not have the power to earn the respect of his experienced French opponent, while the Englishman's defences were too easily breached.
Mendy, who had 32 wins from 37 pro fights before Saturday, walked away with the fringe WBC 'international' lightweight title while Campbell was left to ponder his next move.
The lightweight division in Britain is brimming with talent. Manchester pair Anthony Crolla and Terry Flanagan are the WBA and WBO champions respectively, with the latter defending his title against Liverpool's Derry Mathews in February.
Olympic champion Luke Campbell has suffered his first loss as a professional, falling to a points defeat by France's Yvan Mendy.