It was one of the largest items ever to be lost by a spacewalker, and occurred during an unprecedented attempt to clean and lubricate a gummed-up joint on a solar panel.
Heidemarie Stefanyshyn-Piper was just starting to work on the joint when the mishap occurred.
She said her grease gun exploded, getting the dark gray stuff all over her helmet camera and gloves. In the process of wiping off her gloves, the bag slipped out of her grip, and she lost all her other tools.
"Oh, great," she mumbled.
CBS News correspondent Peter King reports the astronauts' main job Tuesday was to start work on the motor that aims the station's solar power wings toward the sun -- it has big gears -- and has been pretty much stalled for more than a year.
The joint is located near the extreme reaches of the 220-mile-high outpost. The spacewalkers had 85-foot safety tethers to keep them connected to the mother ship at all times.
Stefanyshyn-Piper was carrying out the spacewalk with Stephen Bowen. He had his own tool bag with another grease gun, putty knife and oven-like terry cloth mitts to wipe away metal grit from a clogged joint at the space station.
Mission Control agreed the spacewalk would continue as planned, and that the two astronauts would share tools. Flight controllers were assessing the impact the lost bag would have on the next three planned spacewalks.
It was the first of four spacewalks planned for space shuttle Endeavour's two-week visit to the space station; the astronauts also are making home improvements.
Earlier, the spacewalkers spotted a screw floating by, but were too far away to catch it. "I have no idea where it came from," Stefanyshyn-Piper told Mission Control.
Mission Control said the screw was not considered a serious hazard, but did not immediately elaborate on the missing tool bag. Flight controllers were tracking its location in orbit.
The lost bag marred what had been a near-flawless mission by Endeavour and its seven-member crew.
Putting her disappointment aside, Stefanyshyn-Piper - the first woman to be assigned as lead spacewalker for a shuttle flight - carried out her work on the joint with Bowen.
For more than a year, the jammed joint has been unable to automatically point the right-side solar wings toward the sun for maximum energy production. The repair work - expected from the outset to be greasy and hand-intensive - is supposed to take up much of all four spacewalks.
NASA suspects a lack of lubrication caused the massive joint to break down; grinding parts left metal shavings everywhere and prompted flight controllers to use the joint sparingly. Besides scraping and wiping away the grit and applying grease, the spacewalkers will replace the bearings.
As a precaution, extra grease will be applied on a later spacewalk to the joint on the opposite side of the space station that has allowed those solar wings to produce ample electricity.
Before tackling the joint repairs, Stefanyshyn-Piper and Bowen had to get some relatively mundane work out of the way. First on their to-do list: collecting an empty nitrogen gas tank outside the space station and hauling it back to the docked shuttle for return to Earth. Then they had to move an ammonia hose coupler from the shuttle over to the station, storing it on a giant toolbox holding other spare parts.
As the action unfolded outside, the astronauts inside the shuttle-station complex started unloading the gear inside a huge trunk that was brought up by Endeavour.
The big-ticket item - and one of the first things to be hooked up - is a recycling system that will convert astronauts' urine and sweat into drinking water. It is essential if NASA is to double the size of the space station crew to six next June.
Endeavour also delivered an extra bathroom, kitchenette, two bedrooms, an exercise machine and refrigerator that will allow space station residents to enjoy cold drinks for the first time.
The additions - coming exactly 10 years after the first space station piece was launched - will transform the place into a two-bath, two-kitchen, five-bedroom home.
Endeavour arrived at the space station Sunday. The shuttle will remain docked through until at least Thanksgiving. The next spacewalk is set for Thursday.