City hammered Chelsea 6-0 at the Etihad Stadium two weeks ago but Maurizio Sarri's switch of system to use Eden Hazard as a false nine – with Gonzalo Higuain missing out at Wembley on Sunday – boosted his side's defensive solidity.
Pep Guardiola claimed pre-match it was too early to talk about City's chances of winning a historic quadruple despite being in the FA Cup quarter-finals, leading their last-16 Champions League tie with Schalke and sitting neck-and-neck with Liverpool in the Premier League.
Remarkably, an injured Kepa would not make way for Willy Caballero in extra time and, although he saved one spot-kick, Sterling converted the decisive effort for City to deny Sarri, reportedly close to the sack, his first trophy as a manager.
A controversial start saw Jorginho escape punishment after appearing to elbow Sergio Aguero straight from kick-off before referee Jon Moss gave no foul when Oleksandr Zinchenko's challenge halted the progress of N'Golo Kante as the midfielder ran through on the City goal.
City began to find their rhythm and Aguero rifled a shot over the crossbar before his deflected effort was easily claimed by Kepa.
The holders thought they had opened the scoring in the 56th minute but Aguero was rightly flagged offside and a VAR check upheld the decision.
Kante should have broken the deadlock but, after Hazard's dazzling run deceived City's half-time substitute Vincent Kompany, he blazed the perfect cutback over the crossbar.
Aguero and Sterling could not find a finishing touch in an extra-time goalmouth scramble before City's record goalscorer was denied by Kepa.
The Blues keeper required treatment twice in the added period but refused to be replaced by Caballero, who saved three penalties for City in the 2016 final, leaving Sarri furious.
Jorginho's tame effort was saved by Ederson to hand Chelsea an immediate advantage, but Kepa saved from Leroy Sane then David Luiz hit the post.
Hazard's Panenka effort kept Chelsea alive but Sterling crashed his strike in off the crossbar to retain the title for City and keep their quadruple hopes alive.
Luiz shores up Chelsea defence
Often treated as something of a joke figure by supporters, Luiz produced an outstanding performance in the heart of the Chelsea defence. He was completely dominant in the air but will rue his miss in the shoot-out.
