When times are hard and it looks like you can't make ends meet, you might want to throw in the towel.
And similarly in sporting events, when you don't think that you can win, and a loss looks a grim inevitability, you might want to throw in the towel and give in.
And sport is in fact where this comes from - fighting in general, and still used in modern boxing.
As a symbol that they were giving up or had had enough, the team that was losing would throw in the towel for its fighter, indicating that they had had enough and were going to accept defeat rather than carry on and risk damaging their fighter.
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