United beat 10-man Queens Park Rangers 2-0 at Old Trafford to increase the pressure on second-placed City, who kicked-off away to Arsenal later Sunday eight points adrift of their cross-town foes.
And that remained the gap when, with three minutes left, Arsenal's Mikel Arteta beat England goalkeeper Joe Hart from long-range with a superb shot to seal a 1-0 win for the Gunners that saw them leapfrog north London rivals Tottenham Hotspur into third place.
City's misery was compounded when temperamental striker Mario Balotelli was sent-off a minute before full-time.
Before kick-off, City manager Roberto Mancini said City had to win to stay in the title race.
"Today for us is like a final, otherwise eight points is too much," he told Sky Sports.
At Old Trafford, United -- now two goals better off than longtime leaders City on goal difference -- won their eighth successive league match.
Wayne Rooney scored his 30th goal of the season from the penalty spot in the 15th minute after QPR captain Shaun Derry was controversially sent off for a push in the box on Ashley Young.
Replays suggested contact was minimal and that Young was offside.
Veteran midfielder Paul Scholes sealed victory when he lashed the ball in from the edge of the box in the 68th minute.