Darren Ferguson's men were beaten 3-2 by their lower league opponents as Andy Thorn's perfect start as Kidderminster Harriers boss continued with a determined showing at London Road.
It took close to a quarter of an hour for the first effort of the cup-tie with experienced midfielder Lee Fowler firing wide of the near post after patient build-up from Harriers.
Joe Lolley saw a shot routinely stopped by Olejnik while at the other end, Jeffers headed a Knight-Percival centre over the top.
The deadlock was broken on 26 minutes and it came in rather fortuitous circumstances, a deep Kearns cross eluded the goalkeeper Lewis and with Jackman and ROWE at the back post, it was the Posh skipper who appeared to get the final touch to force the ball over the line.
Morgan-Smith wasted a glorious chance to level the scores on 33 minutes after he was found by Gash, but he fired straight at a well-positioned Olejnik.
Posh were dealt a blow on 39 minutes as Rowe limped out of the action with Joe Newell his replacement. Jeffers steered a volley wide of the target on 40 minutes after a good cross from his strike partner Assombalonga.
Knight-Percival saw a header clawed away from danger by Lewis before Morgan-Smith was cautioned for a wild lunge on the same Posh player. In first half stoppage time, Assombalonga steered a Little cross wide of the near post as Posh pushed for a second goal.
The visitors drew level on 48 minutes as local lad Michael GASH met a left-wing centre to plant a powerful header past Olejnik from close-range unchallenged.
Within 60 seconds, Mark Little hit the post with a right-footed shot after bursting into the box as Posh tried to restore their advantage. However, it was the Skrill Premier League side who got the next goal as a swift counter-attack, led by Lolley was emphatically finished by BYRNE past Olejnik.
On 73 minutes, Swanson saw a curler beaten away by Lewis from 20-yards. On 74 minutes, Posh drew themselves level as Vaughan needlessly felled ASSOMBALONGA in the box and he stepped up and sent the keeper the wrong way from the spot.
However, within two minutes, Kidderminster were back in front as highly-rated winger LOLLEY cut inside from the left and drilled a left-footed shot past Olejnik and into the back of the net.
Jeffers headed a Swanson cross over the top on 86 minutes as time began to run out for Posh.
Final Score: Posh 2-3 Kidderminster Harriers
Posh: Olejnik, Little, Knight-Percival, Brisley, Bostwick, Payne, Anderson (sub McCann 60min), Rowe (sub Newell 39min), Kearns (sub Swanson 60min), Assombalonga, Jeffers. Unused subs: Day, Ntlhe, Ephraim, Coulson.
Kidderminster: Lewis, Vaughan, Demetriou, Storer, Byrne, Fowler, Gash, Jackman, Lolley (sub Dyer 88min), Morgan-Smith (sub Johnson 62min), Gowling. Unused subs: Vaughan, Dunkley, Malbon, , Angus, Riis.
Attendance: 3,483 (660 Kidderminster fans)