Goals from Edin Dzeko and Alvaro Negredo secured City's 10th consecutive win over the Magpies as Manuel Pellegrini's high-scoring team extended its unbeaten run in all competitions to 15 games.
But the result did not reflect the intensity of a game overshadowed by referee Mike Jones' decision to disallow Cheikh Tiote's apparent equalizer, ruling that Yoan Gouffran interfered with play in an offside position.
Negredo secured City's win in added time while league top scorer Luis Suarez scored twice for Liverpool and Steven Gerrard converted a disputed penalty.
City won its third straight away game to climb one point above Chelsea in the standings ahead of Arsenal's match at Aston Villa on Monday. If the Gunners win, they will move back to the top of the table.
But City's successful day was marred by Samir Nasri sustaining a knee injury and having to be carried off on a stretcher after a reckless tackle by Mapou Yanga-Mbiwa, who escaped with a yellow card. Nasri was set to undergo scans on Monday, with the club fearing he may have sustained ligament damage.
"Nasri has I think a serious injury to his knee, we will see tomorrow. I repeat it was a direct red card," City manager Manuel Pellegrini said. "It's his medial ligament. We will see tomorrow what has happened with him."
Pellegrini's team has now won six consecutive league matches and scored a total of 94 goals in all competitions, more than its entire tally for last season.
Utilizing its usual combination of quick passing and movement, City moved in front as David Silva released Aleksandar Kolarov on the left side before the Serbia defender sent a low cross for Dzeko to fire into the back of the net for his fifth league goal of the season.
But Tiote and the whole crowd thought he had equalized when he fired a stunning shot into the top corner in the 34th minute. The linesman's flag stayed down but Jones went over to talk to his assistant before disallowing the goal, judging that Gouffran, standing in front of Joe Hart in an offside position, was interfering with play. A dejected Alan Pardew shook his head in disbelief while Newcastle fans booed the decision and started to sing "1-0 to the referee."
"We're in an entertainment business and the guy's hit a wonder goal that Joe Hart isn't going to save," Pardew said. "I'm not thrilled with the referee's answer when I've asked for an explanation as I don't quite get how he can disallow a goal of that quality on the technical point he is using. Joe Hart is nowhere near it. It goes through a crowd of City players who are impairing his view."
Pardew confronted Pellegrini after the incident, with the Newcastle manager apparently aiming an expletive-laced tirade at his counterpart.
"I apologize for that," Pardew said later.
Negredo put the game away after being sent clear by Milner. Tim Krul did well to save his first shot but the ball ricochet off the 'keeper and Negredo shot into an empty goal.
At Stoke, where Liverpool claimed its first ever league win, manager Brendan Rodgers acknowledged that his team was awarded a soft penalty after Marc Wilson sent Raheem Sterling tumbling in the box despite little contact. Gerrard converted from the spot to put the Reds back in front after they had squandered a two-goal lead.
"I thought it was soft if I am being honest," Rodgers said. "I would call that a Spanish penalty, it is one where the attacker goes into the defender, who does not get the ball, and the contact puts him over. If we get that wee bit of fortune, we will take it."
Liverpool trails City by five points and has one more point than fifth-place Everton in the race for the final Champions League spot.
Suarez grabbed a brace and has now scored 22 league goals while Daniel Sturridge came off the bench to score after a nearly seven-week layoff with a sprained ankle.
Liverpool allowed Stoke to rally from a 2-0 deficit when former Reds Peter Crouch and Charlie Adam cancelled out Ryan Shawcross' own goal and Suarez's first strike. Gerrard then put his team back in front after the interval before Suarez gave the visitors breathing space from Sturridge's assist.
"Daniel Sturridge is a great player who helps the team. It is a long time we did not play with him," said Suarez, whose partnership with the England player had been deadly before Sturridge's injury.
Jonathan Walters pulled one back to ensure a nervous finish for the visitors before Sturridge secured the win two minutes later when he retrieved the ball near the goal line after his initial effort was saved, juggled it and slotted home from close range.