Sindhu went down fighting 13-21, 23-21, 18-21 to World No. 12 Sato in a second round match that lasted an hour and five minutes.
It was Sindhu first event after the Olympics and her next tournament is the French Open next week.
It was a bad day for India at Denmark as Ajay Jayaram and H S Prannoy also suffered losses in the second round of the men's singles event.
Jayaram fought hard before going down 21-23, 15-21 to Shi Yuqi of China, while Prannoy lost 10-21, 20-22 to top seed Lee Chong Wei of Malaysia in a gruelling contest.
Sindhu fought back from 1-3 to lead 12-8 at one stage but she blew it as sato marched ahead, reeling off sixth points and then grabbing seven straight points.
In the second game, Sindhu was 10-15 down but she didnt give up and turned the tables after being tied 21-21 at one stage.
The decider was another tough battle as both the shuttlers went neck and neck till 18-18 when the Japanese surged ahead.
Image: P V Sindhu
Photograph: Robertus Pudyanto/Getty Images
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