Morales moved up to the Lightweight division in search of a possible fourth WBC title. During a holiday visit to the Philippines in January 2007, Morales told a local newspaper that he was fighting again but declined to name his next opponent. He stated that he had unfinished business in the boxing ring and was determined to regain recognition as a world champion. He also expressed his desire to become the first Mexican fighter to win four WBC titles in different divisions and surpass Julio César Chávez's record by campaigning at the Lightweight class of 135 lb.

On August 4, 2007, Morales fought David Díaz for the WBC Lightweight title and lost a close unanimous decision at the Allstate Arena. Judges Herminio Cuevas Collazo, and Robert Hecko both scored Round 1, 10-9 Morales, even though Morales knocked down Diaz in that round. Collazo then went on to score Round 2, 10-8 for Diaz, when not only a knockdown did not occur, but the two other judges saw it as a Morales round. The final scores read 114-113 (Collazo), 115-113 (Hecko) and 115-112 (Uratani), all in favor of Diaz. It was Morales' fifth loss in his last six bouts. During the post-fight press conference, Morales announced his retirement from boxing.

Morales has stated that he will fight again in late 2009 to early 2010, after he gives his body enough time to rest. Morales also stated that he will continue to fight as a Lightweight.

Morales will officially end his retirement in the spring of 2010, as he is scheduled to face former lightweight titleholder Jose Alfaro in a welterweight bout on March 27 in Monterrey, Mexico.