25NL Hand...should I be folding this?

[Sherman]

Villain is CO and this is his 4th hand at the table. No reads yet. He has ~$12.00 behind after his flop check/raise.

Poker Stars, $0.10/$0.25 NL Hold'em Cash Game, 6 Players
LeggoPoker.com - Hand History Converter

UTG: $2.35
MP: $6.15
CO: $25.40
BTN: $10.10
Hero (SB): $51.85
BB: $26.05

Pre-Flop: A[img]/images/graemlins/club.gif[/img] K[img]/images/graemlins/diamond.gif[/img] dealt to Hero (SB)
2 folds, <font color="red">CO raises to $0.75</font>, BTN folds, <font color="red">Hero raises to $3</font>, BB folds, CO calls $2.25

Flop: ($6.25) K[img]/images/graemlins/spade.gif[/img] Q[img]/images/graemlins/diamond.gif[/img] 9[img]/images/graemlins/diamond.gif[/img] (2 Players)
<font color="red">Hero bets $5.25</font>, <font color="red">CO raises to $10.50</font>, Hero folds

Results: $16.75 Pot ($0.80 Rake)
CO mucked and WON $15.95 (+$7.70 NET)

If I should be folding in this spot or shouldn't be, how should I have played it differently PF or on the flop to avoid this spot?

Sherman