The six-time African champions were relatively stable in the first half, but they suffered a sudden collapse after the interval to allow the Desert Foxes to notch three goals in less than 20 minutes.
Shehata is convinced that his men's morale was completely damaged when the hosts broke the deadlock, saying the match 'doesn't reflect Egypt's real caliber'.
"The opener was damaging, it abysmally affected us and gave Algeria the opportunity to seal a reasonable victory," the former Zamalek star told Al-Khabar.
"But the game doesn't reflect Egypt's real caliber."
Chance
Although the embarrassing loss heavily dented Egypt's hopes, Shehata believes that a world Cup berth is still within grasps.
"We still have a chance to reach the World Cup, but we must win our forthcoming qualifier with Rwanda, otherwise our campaign would be doomed to failure," he explained.
Egypt now lie bottom in Group C with a single point, while Zambia and Algeria are joint leaders on four points.