Hopes of an Easter revival were dashed at Selhurst Park where goals from Glenn Murray and Jason Puncheon sank the champions, with Yaya Toure’s stunning late drive merely a consolation.
With City now nine points behind leaders Chelsea having played a game more a comeback in the title race would take a near-miraculous turn around.
Immediate focus must now turn to Sunday’s derby opponents United, who sit a point and a place above City in the table in third.
Manuel Pellegrini’s men had started the evening well in the capital, dominating the early possession and striking the woodwork through Sergio Aguero’s rasping shot.
David Silva was prompting and probing through the middle in characteristic style - the little Spaniard forced Eagles keeper Julian Speroni into two sharp saves - while Jesus Navas injected tempo with his raiding runs down the right.
It seemed only a matter of when not if City would take the lead. Then, seemingly from nowhere, Palace went ahead after 34 minutes.
Murray prodded in from close range after Scott Dann’s deflected shot, although there was a suspicion of offside against both players.
Despite the setback the early pattern of play was quickly re-established, with Martin Demichelis flashing one volley just over after Edin Dzeko’s flick on.
City went in at half time behind and their arrears increased shortly after the restart.
Fernandinho felled Murray as he drove goalwards and from the resulting free-kick Puncheon curled the ball over City’s wall and beyond Joe Hart.
Now City had it all to do and the play became broken as Palace’s organised banks of defence dug in.
There was penalty woe for Pellegrini’s men when Murray appeared to handle the ball in the box with nothing given.
Eventually City had hope.
Substitute Samir Nasri had a hand in the build up but the finish was all down to Toure, who lashed a curling left-footed effort in from distance with 77 minutes on the clock.
Only a brilliant one-handed save from Speroni denied Toure a second as time ticked away.
City couldn’t make the breakthrough and slipped to their third Premier League defeat in four games. The champions will need to show all their mettle now in the Old Trafford derby this weekend.
