Glenn Murray and Jason Puncheon had provided Palace with the two-goal buffer they required to hold on to the points after Yaya Toure had given City late hope with a 78th minute strike.
Yet while City finished the game on the front foot, this display, marred by more defensive frailty, highlighted why they have failed to sustain their challenge this season.
Pellegrini refused to blame his players afterwards. “I am very happy with the way my team played. Normally we’ll win if we play like this,” said the Chilean, who felt Palace’s opening goal was offside.
Before the game Pellegrini had maintained his side could not afford any slips during their last eight games of the season, while hoping Chelsea suffer an abrupt dip in form. By the time the final whistle went, City had served up two more slips that effectively cost them the game.
First the defence stood appealing for offside when Murray scored from close range then an unnecessary foul by Fernandinho allowed Puncheon to beat Joe Hart with a well placed free-kick.
“When the champions come to town you’re not really expected to get the win but we fought hard,” said Murray.
Chelsea are almost out of sight and Pellegrini’s side now have other concerns, with Arsenal and United’s weekend wins forcing City down to fourth ahead of this game, raising the possibility of them missing out on automatic qualification to the Champions League group stage. With Pellegrini’s own future now subject to scrutiny after a disappointing title defence and another poor European campaign, there is an air of uncertainty surrounding City. A return of just four wins in their previous 10 games confirms all is not well and to add to Pellegrini’s worry lines, Wilfried Bony was ruled out after picking up an ankle in training on Sunday.
It could quickly have got much worse for City. With less than two minutes on the clock, Palace left-back Martin Kelly sent a low cross in front of the visitors’ goal and Wilfried Zaha should have done much better than sky his close range effort over. Palace’s threat had been confirmed, however.
City, though, quickly adopted the manner of a side with plenty to play for and began to dominate possession. And in Sergio Aguero they had a player capable of adding an incisive cutting edge to their approach play.
The Argentina forward demonstrated his pace to collect a long clearance from keeper Joe Hart and get in behind the home defence. Julian Speroni, Hart’s opposite number, was drawn out of his goal as he forced Aguero wide but the striker had the vision to spot David Silva approaching the edge of the area in support and it took an excellent reaction save from the scrambling Speroni to deny the Spain international’s powerful shot.
Aguero then produced another instinctive moment that could have produced a 19th-minute opening goal when we he worked space for himself 18 yards out before firing a low snapshot that rebounded to safety, with Speroni beaten.
If only City had players capable of showing such speed of thought at the back. After apparently taking control of the game, Pellegrini’s side found themselves behind 10 minutes before the break and while they complained Murray’s goal should have been ruled out for offside, the blame should have been directed at the lack of concentration shown by the back-line.
There appeared to be little sign of danger when a Palace corner was easily cleared but the ball ran out towards Joel Ward and when the defender clipped it back into the area, City’s defenders remained statuesque, appealing for offside and failing to track first Scott Dann who saw his volley saved by Hart and then Murray who followed up to put the rebound in from close range.
City were clearly rattled by the decision and Vincent Kompany continued to argue the point with referee Michael Oliver as he left the field at half-time. The City captain had more to worry about immediately after the restart, however, when Fernandinho’s unnecessary foul on Murray allowed Puncheon to beat Hart with a superbly flighted free-kick.
Toure finally served up a response with a powerful late shot but City were unable to rally and it was too little, too late.
CRYSTAL PALACE (4-2-3-1): Speroni 7; Ward 7, Dann 8, Delaney 7, Kelly 7; Ledley 6, McArthur 8; Zaha 7 (Gayle 86), Puncheon 8, Bolasie 6 (Souare 83); Murray 9 (Sanogo 82).
MANCHESTER CITY (4-4-2): Hart 6; Sagna 6, Kompany 5, Demichelis 6, Clichy 6; Navas 5 (Nasri 76, 6), Fernandinho 5 (Milner 86), Toure ,7 Silva 7; Dzeko 5 (Lampard 65, 6), Aguero 8
Referee: M Oliver