To lose touch is to stop being in contact with somebody. Nobody fell out; the letters just got further apart and then stopped.
It takes with, and the phrase is nearly always regretful — you do not lose touch with people you meant to drop. There is a second use with no people in it at all: a politician who has lost touch with the country has stopped understanding it, which is one of the harder things you can say about somebody. Keep in touch is the hopeful opposite and the standard thing said at a leaving do.
1phraselose touchTo stop being in contact with somebody.
“It is easy to lose touch with people after a move.”
2phraseunderstandingTo stop understanding what a group of people are like now.
“Ministers who lose touch with ordinary households lose elections.”
lose touch is a fading of contact.
Practised in Common Word Pairs