The Australian lost to Brazilian Gabriel Medina in the final moments of his semifinal heat.
The final was an all-Brazilian affair with fellow countryman Adriano de Souza beating Medina to become the second Brazilian World Champion ever, and the first to win the Pipe Masters.
The close semifinal heat was fought under difficult personal circumstances for Fanning, who the day before had learned of the death of his elder brother, 43-year-old Peter.
The celebrated Aussie surfer heard the news hours before his quarterfinal with 11-time world champion, Kelly Slater.
"I am so grateful for the incredible love and well wishes that have come my way since learning of my eldest brother's passing this morning," the three-time world champion wrote on his Instagram account.
"Today was one of the most challenging days of my life but I knew I could find the strength to take part in the final event of the season because that's what Pete would have wanted."
Tragically another Fanning brother, Sean, died in a car accident in 1998. In his 2009 book "Surf for your Life," Fanning spoke of the impact it had on his life and priorities.
"It just really made me appreciate life more. I had known people who had died before that -- and I was rattled by it -- but when it hit so close to home it was so different," he wrote at the time.
"I began thinking about what I wanted: I want to be a pro surfer, and that's what I'm going to do."
The fight for his own life
In July this year Fanning came close to losing his own life, when he was forced to fight off a shark attack
during a surf competition in South Africa.
The incident was televised live and the dramatic footage was widely circulated after the event.
Incredibly, he managed to scare the shark off by punching it in the back, but a lot of the scrap was obscured by a wave swell, leaving viewers terrified that the surfer had been pulled under the water.
Fanning's mother, Elizabeth Osbourne, told media at the time that it was as though time slowed down as she watched her son fighting for his life.
"I was terrified. Absolutely terrified, I thought we'd lost him," she told Fairfax. "I just couldn't imagine him coming out of it."
The Fanning family has asked for privacy while they come to terms with their loss.
"Our hearts and thoughts are with Mick and his family," said World Surfing League CEO Paul Speaker in a statement. "The entire WSL family extends their deepest condolences."