The result leaves City needing a win against Club Brugge next Wednesday in their final match of the league phase to stand any chance of getting knocked out.
Despite a goalless first half, City would have been relieved to hear the half-time whistle as Achraf Hakimi had his opener ruled out for offside following a VAR check.
After the break it appeared as if a spark was ignited in Pep Guardiola's side, with Jack Grealish brought on for Savinho.
Within five minutes the former Aston Villa star had the ball in the back of the net, lashing home from a poorly deflected cross to send the visitors ahead.
Erling Haaland struck gold with another poorly defended delivery three minutes later, doubling City's lead.
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In what has become synonymous of late with City taking the lead, PSG soon turned their fate around.
Another two goals in quick succession came from Ousmane Dembele and Bradley Barcola to make it 2-2.
Dembele sent in the first from Barcola's quick break down the right hand side and within four minutes, Barcola made it onto the scoreboard himself.
The French 22-year-old had a fantastic game against the former Champions, striking after Dembele hit the crossbar.
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It was far from over for City however as the Parc des Prince was rocking.
Joao Neves added a third before Goncalo Ramos netted a fourth after a late VAR check ruled him onside.
The defeat leaves City languishing astonishingly in 25th, one place into the Champions League league phase relegation zone - a competition they won so dominantly just two years ago.
PSG on the other hand, moved into 22nd place to leave their play-off hopes in their own hands.
Guardiola's side take on Belgian side Club Brugge at the Etihad Stadium on Wednesday night.