The Premier League's bottom club more than held their own during the opening exchanges at the Etihad Stadium on Saturday, but found themselves up against it when the assistant referee flagged for a foul by Fernando Amorebieta on Alvaro Negredo.
There was undoubtedly contact in the area - the centre-back's knee plunging into Negredo's back - but the fact that both players were looking skywards chasing a lofted ball meant any intent was questionable.
"There was contact, sure, but I think it was the moment when we lost the game," the German said.
"For me it was not a penalty but the decision was (that it was).
"Until the point I think we were doing quite well, coming here with a win last week and we looked forwards to have a good result.
"That penalty was, at the moment, not a decision that we can manage.
"I think we lost confidence and after the second penalty we didn't play anymore."
On the back of last weekend's 1-0 win over Newcastle, Magath was deeply unhappy with the manner in which his side capitulated during the final half an hour.
Asked whether his side "gave up mentally", Magath replied: "Yeah, sure.
"We have to talk about the situation that we don't fight, not until the end of the game, because it's not correct - especially for our fans.
"They come to Manchester and they like us to win or make a good game, so we have to fight for 90 minutes, not only 60 minutes."
