Peter Ramage's side fell behind in the first-half at Bloomfield Road following Arnold Matshazi's composed opener before the Blackpool striker doubled his and the Seasiders' advantage after slotting home from inside the penalty area.
The young Magpies, who reached the quarter-finals of the competition last term, were unable to book their spot in the last-eight for a second successive season as Jake Daniels' finish from distance confirmed Newcastle's exit from the cup.
In front of 1,343 spectators, the opening goalscoring opportunity fell to United's Jay Turner-Cooke as the 18-year-old midfielder, who joined the Magpies' youth set-up from Sunderland in January 2021, saw a curling effort from the edge of the box tipped over the crossbar by Blackpool goalkeeper Alec McLachlan.
United's youngsters survived an attacking threat from the hosts as Daniels ran in behind the Newcastle defence before his cross-cum shot flew across the six-yard area.
However, in the 22nd minute, Blackpool opened the scoring through Matshazi. After Luke Mariette played a neat through ball behind the Newcastle backline, the teenage striker beat the offside trap before calmly firing the ball past goalkeeper Max Thompson.
Thompson produced an important stop to deny Dannen Francis minutes later as the 17-year-old shot-stopper, who kept a clean sheet on his England under-18s debut in October, held Francis' powerful drive towards goal.
Blackpool continued their push for their second goal of the night as Joe Strawn drilled the ball over the bar following dangerous intricate play from the hosts.
In the 37th minute, Newcastle were dealt a further difficult blow as Matshazi doubled his and Blackpool's lead. After Daniels played a neat pass into the forward's path, the youngster advanced into the box before firing the ball into the bottom left-hand corner via the post.
Newcastle began the second-half in bright fashion in order to halve their deficit as Kyle Crossley, who scored on his under-23s debut against Crystal Palace in April 2021, latched onto Michael Ndiweni's cutback from the byline before the winger's strike was blocked, as was Jamie Miley's rebound.
The Toon teenagers, who have lifted the Youth Cup twice - in 1962 and 1985 - were awarded an indirect free-kick after McLachlan picked up a back pass from his own defender but Turner-Cooke's close-range strike was unable to pass a group of defenders situated on the goal line.
Newcastle substitute Josh Donaldson went close to making a positive impact as the teenage striker raced onto Michael Ndiweni's pass before cutting inside but saw his effort deflected wide by Will Squires.
Ndiweni went close to setting up a nervy finale as the Throckley-born forward raced onto Crossley's neat pass but his drilled low shot was turned out for a corner by McLachan.
In the 79th minute, Newcastle conceded a third through Daniels' long-range strike. After Thompson's intended pass was intercepted by Mariette, the midfielder picked out Daniels before the striker fired the ball towards an empty net, despite Rory Powell's efforts to avoid the ball trickling past the line.
Newcastle United Under-18s: Max Thompson, Rory Powell, Harry Barclay, Ellis Stanton, Beau Beresford, Jamie Miley (c), Lewis Miley (Johnny Emerson 75), Ben Parkinson (Josh Donaldson 54), Kyle Crossley, Jay Turner-Cooke, Michael Ndiweni.
Subs not used: Harry Powell, Steven Bessent, Dylan Charlton, Lucas Cooper, Shaun Mavididi.
