City capitalized on Chelsea's 2-1 defeat at Newcastle by beating Everton 1-0, with a left knee injury sustained by star striker Sergio Aguero early in the game marring an otherwise great day for the champions.
Newcastle shattered Chelsea's unlikely bid to go through the 38-game campaign undefeated, pushing 2-0 ahead through a second-half double from Papiss Cisse and then hanging onto its lead after the 81st-minute sending-off of Steven Taylor.
Didier Drogba's headed goal in the 83rd set up a frantic finish but Chelsea came unstuck at St. James' Park for the third straight season, ending a 14-match unbeaten start in the league.
"The best team lost. The team which tried to win lost," said Chelsea manager Jose Mourinho, who hasn't won at Newcastle in five attempts. "We were unlucky."
Aguero, the league's top scorer with 14 goals, limped off in tears after getting hurt in a seemingly innocuous challenge in the second minute at Etihad Stadium. If the Argentina striker had been on the field, he would have taken the penalty converted by Yaya Toure in the 24th minute for the winning goal.
Arsenal missed a chance to climb provisionally into the top four by losing 3-2 at Stoke, conceding to Peter Crouch after 19 seconds — making it the quickest goal of the season — and two more times in the first half.
Santi Cazorla, with a penalty, and Aaron Ramsey scored in the space of two second-half minutes to reduce the gap, but Arsenal's hopes of completing a recovery were dented by Calum Chambers' red card with 12 minutes left. Arsenal has won just once in its last nine games at Stoke.
Liverpool and Tottenham failed to make up ground in the race for the Champions League places, drawing 0-0 at home to likely relegation candidates Sunderland and Crystal Palace, respectively, to remain marooned in mid-table. Liverpool started captain Steven Gerrard on the bench for the second time in three league games.
It was also goalless between Hull and West Bromwich Albion while Queens Park Rangers jumped out of the bottom three by beating Burnley 2-0. Charlie Austin scored QPR's second goal before getting sent off for a second booking.
It was Chelsea's first defeat since April — ending an unbeaten run of 23 games, 21 of which have come this season. Such was Chelsea's explosive start to the league season and the strength of its squad that there was growing talk that the team could emulate the Arsenal team of 2003-04 in going the campaign undefeated.
Goals by Cisse in the 57th and 78th put paid to that.
Mourinho said he had "no complaints" about the result but was unhappy that ball-boys and Newcastle fans took too long to return the ball to the field.
"You need one ball," he said. "Sometimes we had no balls and other times we had two balls."
City played three hours later and sealed a fourth straight win thanks to Toure's penalty, awarded after James Milner was fouled by Phil Jagielka.
City goalkeeper Joe Hart preserved the lead with a brilliant late save to deny Romelu Lukaku.