Matt Ritchie's penalty 10 minutes from time sealed one of the most surprising results of the season to leave Liverpool with the chance to move seven points clear with a victory over Leicester City on Wednesday.
Sergio Aguero looked to have set a predictable tone for Pep Guardiola's 100th top-flight game at the helm, his goal after 24 seconds apparently teeing the Catalan up for a record 74th win from that century of outings.
But City failed to build on that fast start and the hosts levelled through Salomon Rondon with 24 minutes remaining.
And when Fernandinho fouled Sean Longstaff in the box, Ritchie stepped up to drive his spot-kick underneath Ederson and strike what could be a pivotal blow in the title race.
With City having taken 46 points from the last 48 available against the Magpies, Rafael Benitez may well have hoped just to keep things tight early on.
Any such plans were shattered before he even had the chance to warm his seat.
David Silva stumbled into Raheem Sterling's cross, diverting the ball into Aguero's path for the striker to volley home his 15th goal in 13 top-flight outings against Newcastle.
Aguero was celebrating a second in the 18th minute, but referee Paul Tierney ruled that Kevin De Bruyne was a little too eager in executing a quickly taken free-kick and booked the Belgium midfielder.
To their credit, the hosts held firm for the remainder of the first half, although Florian Lejeune had to be alert to block Silva's shot on the line.
Sterling came within a whisker of doubling the lead early in the second half but allowed Leroy Sane's cross to go through his legs, while Silva stung Martin Dubravka's palms.
Then came the unexpected revival as Rondon, who had cut an isolated figure, sprung to life to lash home after City were caught napping by Isaac Hayden's header over the top.
Ritchie calmly converted from the spot and City could not muster a meaningful response, leaving Liverpool with a golden opportunity to put one hand on a maiden Premier League trophy triumph.
They think it's all over...
Guardiola conceded that his City side could ill-afford to drop any more points in order to retain their crown. Even if they should now win all their remaining 14 games, City would fall short of the 100 points they achieved last season. The title may already have been Liverpool's to lose, but they would have to throw it away now.
Benitez the mastermind
All the talk will be about City losing, but Newcastle won this game fair and square and they did it despite going behind so early on. They stuck to the game plan, stayed in the contest and picked their moments. Credit has to go to the Newcastle boss for pulling this one off.
