The Italian veteran could manage no better than seventh in qualifying, not only behind team-mate Maverick Vinales but also the satellite Tech 3 Yamaha of Johann Zarco.
Rossi said an issue with the rear tyre he used for his second run was responsible for his poor run, after he had set fifth fastest time in Saturday morning's practice.
"My potential was to be in the top five for sure, also [possibly] on the front row," said Rossi, who had been ill on Friday with flu-like symptoms.
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Valentino Rossi (Yamaha Factory) - Austrian GP 2017
Image credit: Yamaha MotoGP
"From the first exit [in third practice] we improved a lot the balance of the bike and I felt comfortable, I was always quite competitive.
"With the soft for the qualifying I was quite strong, but unfortunately the second [soft] tyre didn't work well.
"I had less grip and a lot of spinning.
"I tried to push at the maximum but it was impossible to improve.
Valentino Rossi, Yamaha MotoGP, Getty Images
Image credit: Getty Images
"Unfortunately sometimes it happens, this time it happened to me.
"I have to start from the third row; that is always quite difficult.
"But my pace is not so bad, we have to try pushing from the beginning to the end and we'll see.
Having previously discounted the possibility of using a new fairing Rossi had tried in Brno testing last weekend, Rossi tried it in Saturday morning practice in Austria and kept the bodywork for qualifying.
"Sincerely I think this is maybe not the best track [for it], but yesterday we had a lot of wheelie issues so we decided to test, because it could help for the wheelie," he said.
"In fact it's good to ride, it helps me. So I think we will we use it."
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