Ich war verlegen.

English Translation

I was embarrassed.

I am wondering why “embaressed” is not translated with the past participle “verlegt”?

Because “verlegen” can take on multiple meanings.

  • “verlegen sein” means “to be embarrassed” (“verlegen” is an adjective and doesn’t change when the tense changes, for example, from present to past)
  • “etwas verlegen” means “to misplace something” (“verlegen” is the verb and therefore needs to change if the tense changes)

Your sentence “Ich war verlegt” means “I was misplaced.”

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I think there must be an underlying rule as to what past partiples can be used with “sein” to form a passive construction and which ones can’t. Do you have knowledge of this rule?

Before I looked up the etymology, my answer - and the TLDR - was this:
“verlegen” is a weird, and rare kind of, adjective that looks like a verb but does not change, because it’s an adjective.

After looking at the etymology section of verlegen – Schreibung, Definition, Bedeutung, Etymologie, Synonyme, Beispiele | DWDS
the (long) explanation is this:
“verlegen” does not derive from “legen”, which is a transitive verb, but from “liegen”, which is intransitive. And because it is already a past participle that’s used as an adjective, it undergoes no further changes when it comes to tense, only by case and number (e.g. der verlegenen Person).

The important quotes from dwds:

mhd. verlegen ‘durch zu langes Liegen, durch Nichtstun, durch Tändelei in Trägheit versunken, verdorben’,

In english it means getting tired and lazy from lying too long in bed.

Die Bedeutungsentwicklung führt von ‘untätig’ über ‘ratlos, unschlüssig’ zu ‘befangen, beschämt’.

And then the meaning shifted from there via “clueless, indecisive” to “embarrassed, sheepish”.