The Gunners had impressed in the first half and led the champions 1-0 at half-time following Bukayo Saka's strike, having also been denied a penalty after Ederson's challenge on Martin Odegaard.
But City were given the chance to equalise from the spot ten minutes into the second half after intervention from VAR, when referee Stuart Attwell decided to overturn his original decision following Granit Xhaka's tackle on Bernardo Silva.
Arsenal's four-minute meltdown cost them a result despite an impressive display against Manchester City
The Gunners were 1-0 up when Granit Xhaka challenged Bernardo Silva inside the box
Referee Stuart Attwell initially waved away penalty appeals following the Swiss' challenge
Mahrez then equalised from the spot in the 57th minute following the delay while Attwell checked the monitor, before the boos rang out in the Emirates Stadium, with fans aggrieved the challenge on Odegaard was not checked in similar fashion. But that was only the beginning of the four-minute drama.
Arsenal defender Gabriel Magalhaes was subsequently booked after replays showed he had tried to scuff up the penalty spot prior to the Algerian's kick, although Gunners assistant boss Albert Stuivenberg claimed post-match the caution was given for a remark to the referee after Mahrez's penalty was awarded.
But the hosts could easily have re-taken the lead just 60 seconds later.
A mix-up in City's backline saw Nathan Ake have to clear the ball off the line, but the ball fell kindly to forward Gabriel Martinelli, who - with the goal seemingly gaping - could only strike the ball first time against the outside of the post.
But after consulting the VAR pitchside monitor, Attwell decided to overturn his decision
Riyad Mahrez then equalised from the penalty spot for the Premier League champions
Gunners fans were livid Ederson's challenge on Martin Odegaard earlier had not been checked as Xhaka's had been
But it would get even worse for the home side when centre-back Magalhaes made it two yellow cards in 78 seconds when he cynically brought down compatriot Gabriel Jesus inside the centre circle, and was subsequently given his marching orders.
The 24-year-old's dismissal was also the Gunners' 100th Premier League sending off, the first team in the competition to reach this total, and saw Odegaard sacrificed for Rob Holding as a result to shore up their backline.
But that was not the end of the Gunners' heartache either, as City midfielder Rodri netted in the third minute of stoppage time to secure a 2-1 win for City and continue their excellent unbeaten top-flight record against the Gunners since December 2015.
Arsenal's defeat will not see them fall from fourth this weekend regardless of results elsewhere, but Pep Guardiola's men are now 11 points clear of Liverpool at the top of the table with their scrappy win at the Emirates.
Gabriel Magalhaes (third from left) was booked before the penalty after scuffing up the spot
Gabriel Martinelli then missed a gilt-edged chance to put the home side back in front
Then 78 seconds after his first, Gabriel Magalhaes was booked again and therefore sent off
Guardiola admitted Arsenal were the better side, adding: 'We face a team who had six or seven days since the last game.
'We had two days and come back and didn't have a team. that's why we put one more player in the middle. It was difficult, we didn't have energy.'
Arsenal midfielder Odegaard meanwhile said: 'The feeling is not good. I think we played a great game, we managed to play our game, we put them under pressure, we scored the first goal and I feel we controlled the game pretty well. We had three situations go against us so it's hard to take.'
Gunners goalkeeper Aaron Ramsdale agreed, stating: 'Both penalties, I don't know why the ref is told to see one and not the other.
'It is there for a reason, go and use it. It is the inconsistency. The whole point is to help the game out, in real time it didn't look like one and slow it down on a screen and it is given.'
The 24-year-old's dismissal was also the Gunners' 100th Premier League sending off
Rodri then caused the Gunners further heartache when he scored the winner in stoppage time
Arsenal had impressed during the first half and led thanks to Bukayo Saka's excellent strike
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