Wenger's men were put to the sword by a polished Monaco side at the Emirates Stadium as Geoffrey Kondogbia and Dimitar Berbatov struck either side of the interval.
While Alex Oxlade-Chamberlain appeared to restore a glimmer of hope with a well-placed late strike, Yannick Ferreira-Carrasco had the final say to leave Arsenal facing a fifth consecutive last-16 exit.
"The third goal makes our task extremely difficult in the second leg," Wenger told reporters.
"It looks like we lost our nerve and our rationality on the pitch. The heart took over the head and that doesn't work.
"Mentally we were not sharp enough to get into the game, and we paid for it.
"I hope my players were not complacent, but it looks when you are lacking sharpness that anything is possible. Football is not on paper, it's down to your performance. On the night Monaco produced a performance and we didn't."
Olivier Giroud was among those guilty of wasting opportunities - including a gilt-edged chance when Alexis Sanchez's effort was parried to him just six yards out.
"Giroud had an off night and he missed easy chances," Wenger explained.
"It looked like it was not one of his best days."
