Craig came into the contest after being submitted by Brendan Allen in November on a bitter-sweet night where he became the first Scottish fighter to headline a UFC event.
The 36-year-old was presented the opportunity after impressively stopping Andre Muniz on his middleweight debut four months prior, but he has been unable since to replicate the form he showed that night.
He struggled to find rhythm against 31-year-old Borralho, and was stunned in the first round as the Brazilian displayed his striking advantage with a straight right-left combination.
Craig’s attack consisted of body kicks and takedown attempts that were nullified by Borralho, before the defining moment came midway through the second round.
Borralho landed a flurry of strikes to rock his opponent, before knocking him out with a straight left and extending his unbeaten record in the UFC to six fights.
“I told you all I was going to KO him and I did it,” said Borralho.
“Knocking him out wasn’t about my ego, it was the smartest way to win against Paul. I am a fighting nerd.”
Shore, 29, meanwhile, was fighting for the first time in 14 months after having an arm operation in which bone from his pelvis was fused with his wrist.
Shore was victorious on his featherweight debut after moving up from bantamweight last March, but was stopped from utilising his game plan by the 29-year-old Brito.
Brito, who has now won five of his six UFC fights, deployed a relentless leg kicking strategy that opened up a deep cut on Shore’s shin.
The referee stopped the contest to allow doctors to check on the Welshman, who had blood pouring down his leg.
With medical staff believing Shore had suffered a broken leg, the fight was awarded to Brito on a technical knockout.