Unai Emery's side were dominant in the first-half as they pushed on for a win that would have continued their incredible run of form.
Just before the hour mark, they capitalised on some poor defending from Chris Wilder's side and Leon Bailey was on hand to fire in.
However, Villa's celebrations began to diminish as VAR started their check on a potential foul on the buildup.
Referee Anthony Taylor went over to screen and Jacob Ramsey was adjudged to have fouled Wes Foderingham moments before.
The Villa man appeared to have his hand holding the arm of the Blades goalkeeper, despite Jayden Bogle grabbing his shirt.
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Speaking on commentary for talkSPORT, former Villa defender Martin Keown said: "His arm is definitely being held, there's definitely a foul on him so it has to come back."
"I think we get to the right decision in the end. Foderingham was going bezerk, he clearly felt he was being held.
"But the grey area for me was Sheffield United players had a couple of attempts to get rid of the ball, they didn't take it."
The disallowed goal proved hugely detrimental to Villa as with three minutes remaining, they fell behind on home turf.
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Archer, who was sold to Sheffield United in the summer, netted from close-range to provide the sucker punch for his former club.
He remained relatively calm in his celebrations having scored against his former employers, but his Blades teammates were jubilant.
Villa hit back in stoppage-time though as Nicolo Zaniolo headed in what could prove to be a precious equaliser further down the line.
Speaking at full-time, Keown said: "I think from a Villa point of view, managing the expectations, the last two home games [Manchester] City and Arsenal, much more open.
"This game was about breaking down Sheffield United, they couldn't find the answers. I'm pretty certain that Emery will be able to do that though given time, because he's such a good coach.
"It's a new problem, it's a nice problem, but today they couldn't find a way through."
Villa sit 2nd in the Premier League but missed out on a huge chance to go top and put pressure on Arsenal and Liverpool.
Sheffield United on the other hand have moved off the bottom of the table, with Wilder still winning just once since his return.
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