The Citizens were on course to claim all three points from a mediocre Manchester derby, with Josko Gvardiol's first-half header separating the two teams heading into the closing stages at the Etihad Stadium.
However, Man City unravelled in spectacular fashion and Ruben Amorim's Man United prevailed as Amad Diallo's dramatic a 90th-minute winner was netted just two minutes after Bruno Fernandes had equalised from the penalty spot.
Defeat for Man City represents their eighth in 11 games across all competitions, while a 3-0 home win over Nottingham Forest just over a week ago is their only triumph since the end of October.
Guardiola's side missed the opportunity to gain valuable points on both Liverpool and Arsenal - who drew to Fulham and Everton respectively on Saturday - and they now sit fifth in the Premier League with their title hopes in tatters, nine points behind Arne Slot's table-toppers who have a game in hand.
Man City set unwanted record after latest historic collapse
Man City's collapse against Man United is not their first this season. Indeed the Citizens threw away a three-goal lead with less than 15 minutes remaining in a disappointing 3-3 home draw with Feyenoord in the Champions League last month.
A few weeks prior to that, the Citizens suffered 4-1 and 2-1 defeats to Sporting Lisbon - then managed by Amorim - and Brighton & Hove Albion respectively, despite leading at half time - against Brighton they were ahead with just 12 minutes remaining.
Against Man United, Man City were leading until the 88th minute, but ended up losing 2-1, and this is the latest into a game that a reigning champion has led in the Premier League and lost - an unwanted blot on Guardiola's copybook.
This Man City team is unrecognisable to the one that won a historic treble in 2023 - that included the club's first-ever Champions League triumph - before securing an unprecedented fourth successive Premier League title last season.
Guardiola is undoubtedly facing his biggest challenge yet at Man City - arguably the biggest in his entire managerial career - and even the Catalan himself is now questioning whether he is the right man to turn the club's fortunes around, merely weeks after signing a new two-year contract extension.
Guardiola: "I'm not good enough, simple as that"
Speaking at his post-match press conference, Guardiola said: "I'm the boss, I'm the manager, I have to find solutions, but I don't find solutions.
"This is a big club and when you lose eight [out of 11 games] something is wrong. You can say the schedule is tough or the injuries to players, but no.
"I'm the manager and I'm not good enough, simple as that. I have to find a way to talk to them, to train them in the way we need to play, to press the way we need to press.
"I'm not good enough. I'm not doing well. That is the truth."
Such comments come as a concern to Man City supporters, who are relying on their manager - a club legend and their most successful boss in history - to find this "solution" he has reiterated for several weeks.
"I knew it would be a tough season, but I didn't expect [it to be] so hard," Guardiola added after admitting that his team are 'struggling for different reasons' amidst their well-documented injury problems - ones that cannot be solely to blame for their demise.
Guardiola has also said that Man City "obviously need results to lift our mood", and they will be keen to shake of the disappointment of losing against their rivals when they travel to Villa Park for a challenging contest against Aston Villa on Saturday lunchtime.
Written by
Oliver Thomas