The victory means Australia lead the three match series 2-0.
Edwards put in another impressive performance as she led her team in style hitting 11 boundaries on her way to 90 and a partnership of 107 with Knight.
Knight (72), opening with Danielle Wyatt, made her highest international score and first half-century for England. The pair got off to a steady start, putting on 20 before Wyatt was caught behind in the 8th over.
Lydia Greenway added 16 before she was also caught behind to put England on 52-2.
Edwards then joined Knight to form the most significant partnership of the innings and make her highest score against Australia. The duo looked settled in the middle with the Australian bowling attack unable to move either batter.
The pair looked to up the run rate as they took their powerplay in the 42nd over with England 151-2. Shortly after Knight chipped one in the air straight to cover and was caught by Erin Osborne.
Australia claimed the wickets of Beth Morgan and Jenny Gunn before Osborne ran out Edwards who was ten runs short a century in the 48th over, leaving England on 206-6.
England finished on 214-8 off their 50 overs.
There was no luck for the England bowlers as they were dominated by Shelley Nitschke and Meg Lanning.
Laura Marsh claimed the solitary Australian wicket of Nitschke as Jenny Gunn took a high catch at long off to leave Australia on 151-1 in the 33rd over.
18 year-old Lanning proved too much for England as she went to make 104 not out alongside Leah Polton to secure victory with eight overs to spare.
Heather Knight said: 'I'm pleased to get some runs under my belt and make a good score, but it's difficult to take as we lost the game. We're obviously bitterly disappointed, but we have a lot more cricket to play with another big series ahead and the Ashes Test. We'll rally round as a team and stick together to come back fighting and look to take some momentum into the games ahead.'
