The European champions needed a late equaliser from teenager Alvaro Rodriguez to salvage a point against ten-man Atletico Madrid at the Santiago Bernabeu on Saturday.
The result leaves Real Madrid seven points behind leaders Barcelona, who play at Almeria on Sunday.
Victory for Barcelona will take them ten points clear of Real Madrid with 15 games left to play.
Asked about the title race by DAZN after the game, Ancelotti said: "It was already very difficult before this match, now it's more. We are going to fight until the end, that's what I can say.
"We lacked a bit of freshness. But mentally more than physically. At 1-0, it took us 10 minutes to compose ourselves, to reposition ourselves.
"In the first half there was a lack of intensity and in the second, we reached it at the end, but we didn't fully take advantage of the numerical superiority."
Ancelotti however did take some comfort from the performance of his goalscorer, who became the youngest player to score in a Madrid derby in LaLiga this century (aged 18 years and 226 days).
"It was very important for him, a young man with an enormous dream of playing for Real Madrid," Ancelotti said of the Uruguayan forward. "This will be a special night in his life."
