Chelsea's shock 1-0 defeat at Crystal Palace earlier in the day meant victory for City would see them sitting at the summit on goal difference.
And that looked set to come to fruition as David Silva deservedly broke the deadlock in the 18th minute, with City dominating the first half at the Emirates Stadium.
However, a rejuvenated Arsenal emerged after the break, and Mathieu Flamini pulled the hosts level to boost their own flagging title hopes.
City are now two points adrift of leaders Chelsea, over whom they have two games in hand, and one behind Liverpool, who have played one game more than Manuel Pellegrini's men.
Arsenal are three points further back in fourth.
Pellegrini stuck with the XI that so memorably triumphed 3-0 over local rivals Manchester United at Old Trafford on Tuesday, and the visitors looked hungry to pick up where they left off, Jesus Navas curling an effort just beyond the left-hand post from 18 yards in the opening few minutes.
Tomas Rosicky went down under the challenge of Pablo Zabaleta in the penalty area 12 minutes in, but referee Mike Dean waved away Arsenal's protests, with replays suggesting that it was probably the correct call.
Silva's opener capped a swift counter-attacking move from City – the Spaniard tapping home from close range after Edin Dzeko had rifled an effort against the left-hand post.
Flamini, whose late own goal cost Arsenal in a 2-2 draw with Swansea City on Tuesday, soon had the ball in the back of the net at the other end as a lively first half continued, but his strike, which bounced over the head of visiting goalkeeper Joe Hart, was rightly ruled out for offside.
Samir Nasri – booed and heckled throughout on his former stomping ground – was next to have a pop at goal, but his tame attempt was comfortably collected by Arsenal stopper Wojciech Szczesny.
The match lost some of its pace and flow as the opening period progressed, with niggling challenges threatening to turn it into an ill-tempered affair.
The face of the game changed eight minutes into the second half when Flamini atoned for his midweek misfortune by diverting Lukas Podolski's cross into the back of the net from a central position in the penalty area, drawing Arsenal level with his second goal since returning to the club last year.
Podolski scored and provided an assist on Tuesday and he almost repeated that achievement on Saturday, but Hart did just enough to keep out his powerful drive on the hour mark.
Arsenal were unable find a winner, but a point against the title favourites will come as a relief to manager Arsene Wenger, who has endured a difficult week after marking 1,000 games in charge with a 6-0 defeat at Chelsea last weekend, and will go some way to easing the pain of the 6-3 loss in December's reverse fixture.
