Ilkay Gundogan had opened the scoring for the Blues in the first half before two stunning goals from Jeffrey Schlupp and Andros Townsend turned the game on its head to hand the Eagles a half-time lead.
Luka Milivojevic then converted from the spot and despite a late fightback, as Kevin De Bruyne reduced the deficit in the final moments, the visitors hung on for a first league victory in Manchester in 28 years.
With the Blues trailing league leaders Liverpool by four points, Guardiola refused to be drawn into talk of panic, crediting Palace for their triumph and urging a response from the Champions on Boxing Day.
READ: Blues stunned by Palace smash-and-grab
WATCH: Inside City | Episode 322
GALLERY: Fightback in vain
“We have an incredible team – fantastic players,” he stated. “We started quite decent and created chances. We scored a fantastic goal and after they passed the halfway line they scored.
“The first two times Crystal Palace crossed our halfway line, they scored. We played good. Their second goal was an incredible goal.
“We reacted well to the second goal and in the second half, we started okay. We put more people in the box.
“The third goal... the penalty was really tough for us. We cannot concede the penalty we conceded. We have to try and avoid it. Football is like this – three shots on goal and three goals.
“We scored a goal – a little bit late but even then, we had chances to score. We did absolutely everything.
“They arrived two times and before the penalty, they hit the post but they didn’t have another shot on target.
“Congratulations to Palace. Defensively, they were brilliant. I give a lot of credit.
“That is football and sometimes it happens. The teams are good and there is a lot of quality.
“Now, we must go onto the next one. There are a lot of games to play. We have to recover mentally and recover our physicality.”
