City's calamitous night on the south coast was summed up at the start of the second half when Gareth Barry put the ball into his own net to give Southampton its final goal.
A blunder by City goalkeeper Joe Hart in the first half allowed Steve Davis to net Southampton's second after Jason Puncheon's opener.
City scored only through Edin Dzeko at the end of the first half as Roberto Mancini's side slumped to a third winless game.
The nine-point gap at the top will be extended if leader United beats Everton on Sunday, and Mancini rates City's title prospects at only 10 per cent now.
"I am disappointed with our performance. They deserved to win," Mancini said. "We didn't play well. We conceded a goal that I have never seen in my life."
Chelsea remained third, but was only four points behind City after beating Wigan 4-1 to ease the pressure on manager Rafa Benitez.
Tottenham stayed a point behind Chelsea beating Newcastle 2-1, and Arsenal was four points further back after winning 1-0 at Sunderland.
Queens Park Rangers' faint hopes of surviving the drop took another hit as the bottom-place team lost 4-1 at Swansea.
QPR's relegation seems almost as inevitable as United winning a 20th title now.
City's title defence has rarely looked convincing, with Puncheon taking just seven minutes to put Southampton in front.
Davis compounded City's misery 15 minutes later after Rickie Lambert's shot was spilled by Hart.
Despite Dzeko pulling one back in the 39th after being set up by David Silva, teammate Barry managed to turn the ball into his own net when under no pressure following Lambert's cross.
The result might have heavily rocked City's faint title hopes, but it gave a big lift to Southampton's survival bid.
Southampton was six points and three places above Wigan, which remained second from bottom after losing at Chelsea.
Chelsea went in front in the 23rd minute after Fernando Torres latched onto David Luiz's pass and moved the ball forward to Ramires, who calmly dinked it over Ali Al-Habsi.
The second came 11 minutes into the second half. Cesar Azpilicueta brought down Cahill's deep free kick with his chest, cut into the penalty area and squared to Hazard, who swept the ball into the net.
Wigan produced a response inside two minutes. James McArthur sent the ball to Shaun Maloney on the edge of the penalty area. Cech rushed off his line, but Maloney rounded him before dispatching the ball in the net from a tight angle.
But Wigan couldn't conjure an equalizer before Chelsea's late goals added gloss to the win.
From Hazard's cutback, Frank Lampard blasted in from the edge of the penalty area. In stoppage time, Al Absi batted away a shot from Azpilicueta, but substitute Marko Marin reacted, sending a low header into the net for his first Chelsea goal.
After drawing and losing the last two league matches, Benitez will hope his future is more secure after continued reports his job is under threat after less than three months.
"Nobody is in contact with the owner to find out if he says this or that," Benitez said in response to questions about his future. "It's just speculation. I have to concentrate on winning games."
Tottenham recorded a second successive win as Bale made it four goals in three games.
The Wales winger scored from a dipping free kick in the 5th, and after Yoan Gouffran equalized, he powered in the winner in the 78th.
"We are fortunate to have players of this dimension who can decide games," Tottenham manager Andre Villas-Boas said.
At Sunderland, Santi Cazorla scored Arsenal's goal in the 35th after Jack Wilshere and Theo Walcott combined.
Carl Jenkinson was dismissed in the 62nd after being booked for bringing down Stephane Sessegnon, having already been booked for a ninth-minute foul on Jack Colback.
In south Wales, Swansea's goals all came from Spaniards, with Michu scoring twice and Angel Rangel and Pablo Hernandez also netting.
QPR, which had pulled one back at 2-0 through Bobby Zamora, is four points from safety where Reading is two points above the drop zone.
Reading lost 2-1 at Stoke, which won for the first time in 2013 after goals from Robert Huth and Cameron Jerome.
At Norwich, Fulham extended Norwich's winless run to nine games by holding out for a 0-0 draw.