Proud had been favourite for the title, but was edged out by Scottish teenager Duncan Scott.
Scott touched in 48.66 seconds, with Proud clocking 48.72. Both swimmers were outside the Olympic consideration time for that event, but could still be selected for Rio.
Great Britain needs a 100m freestyle swimmer for their medley relay team, which was why Proud had been targeting that event.
Proud, though, will have another chance of automatically booking a spot on the Great Britain plane to Rio on Saturday when he competes in his best event, the 50m freestyle.
He is Commonwealth champion, British record holder and ranked fourth in the world over the shorter distance.
Meanwhile, Proud’s Leander team-mate Laura Stephens produced an impressive performance to finish fifth in the women’s open 200m butterfly final.
Stephens clocked 2:10.83 in the race won by Aimee Willmott. The Plymouth swimmer was the second fastest junior behind Emily Large, who won bronze.
Emma England won a bronze medal in the junior women’s 50m freestyle race in a time of 26.55, while Jessica Jackson took fourth place in the Target Tokyo 50m freestyle final in 26.13.
There was also a fourth place for Tom Fannon in the junior men’s 100m freestyle final in 51.64.
On Friday, fellow Leander star Antony James will be bidding for glory in the men’s 100m butterfly event.
James goes into the competition ranked number one but has never been able to claimed the British long course title over the distance, despite winning Commonwealth Games silver medal in 2010 and competing at the 2012 Olympic Games.
James, like Proud, has his eyes on the British 4x100m medley relay team.