At her fourth Olympics, Lee finished the race at 37.33 to capture silver. The sprinter holds the world record in the distance at 36.36.
Nao Kodaira captured gold with a new Olympic record of 36.94 in the 500m race to beat Lee's previous Sochi record of 37.28.
Lee had been going for her third consecutive Olympic gold in the discipline, which would have made her only the second female speedskater to do so.
Lee, who made her Olympic debut in Turin in 2006, won her first gold in the sport in Vancouver in 2010, and again in Sochi in 2014.
Lee holds the world record of 36.36 seconds in the 500, but finished the race in 37.33 seconds, behind winner Nao Kodaira, who secured a new Olympic record with a time of 36.94 seconds.
American Bonnie Blair remains the only female speedskater to hold three consecutive Olympic gold medals in the sport. Blair won the 500 in 1988, 1992 and 1994.
The sprinter started skating during her first year in elementary school and discovered her talent by competing with her older brother. In the fifth grade, she became a champion in 500m and 1,000m events at national level races, emerging as a new hope for South Korea's speed skating.
The skater once said that, as she continued to grow as a prospect, her brother had to leave the ice as it was too financially burdensome for the family to support the training of both.
Responding to the sacrifices made by her family, she became one of the most competitive skaters by high school.
Lee made her Olympic debut in Torino in 2006, where she ranked in fifth place in the distance, and eventually shot to stardom by being crowned champion in Vancouver four years later. She added her second title at the following Sochi Olympics.
The skater finished in 23rd place and 12th place in the longer 1,000m event at the 2010 and 2014 Winter Games, respectively, but when it comes to 500m races, she was considered invincible.
To focus on the 500m race, Lee even skipped the 1,000m race held days ahead of the match.
More recently however, Japan's Kodaira, who place fifth in the 500m race at the Sochi Winter Olympics, quickly narrowed the gap with Lee. During the 2017-2018 seasons of the International Skating Union World Cup, the 31-year-old Kodaira finished first in seven 500m races, defeating Lee in all of them.
Nevertheless, Lee's legacy at the Winter Games is expected to motivate younger South Korean speed skaters setting eyes on the
2022 Beijing Winter Olympics and beyond.