With his back to goal, Rooney struck with an acrobatic volley that flew into the top corner in the 78th minute to virtually end City's title hopes. Arsenal remain on United's tail thanks to Robin Van Persie's double in a 2-0 home victory over bottom club Wolverhampton Wanderers.
Rooney's Old Trafford winner left manager Sir Alex Ferguson purring with admiration.
"I've not seen anything like it, that's for sure," a beaming Ferguson told Sky Sports.
"It was stunning, unbelievable. We've had some fantastic goals here but in terms of the execution, you'll never see that."
United had taken the lead shortly before halftime with a well-taken Nani effort before David Silva equalised with a fortuitous goal midway through the second half.
The result gave United 57 points from 26 games with Arsenal on 53 from 26. City's title prospects are receding as they are on 49 having played a game more.
Tottenham Hotspur moved above Chelsea into fourth spot with 47 points from 26 after Croatia midfielder Niko Kranjcar struck the winner for the second successive week in a 2-1 win at Sunderland. Chelsea face Fulham on Monday.
Liverpool's surge under Kenny Dalglish slowed as they were held 1-1 by Wigan Athletic at Anfield to slip eight points off the top four in sixth spot.
At the other end of the table West Ham United recovered from 3-0 down to draw 3-3 at West Bromwich Albion, Blackpool drew 1-1 with Aston Villa and Birmingham City scored late to earn a vital 1-0 win at home to Stoke City. Blackburn Rovers and Newcastle United ended goalless.
Last Saturday's 41-goal spree in the Premier League was always going to be a tough act to follow but the weekend will be remembered for a moment of Rooney magic that even had rival manager Roberto Mancini describing it as genius.
Facing away from goal on the edge of the area, Rooney sprung into the air and twisted to connect with a Nani cross, the ball arcing off his outstretched right foot beyond City's dumbfounded England keeper Joe Hart.
It was only his fifth league goal of a disappointing season but a potentially vital one to keep United on course for a record 19th title and make City's hopes of a first since 1968 remote.
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"I saw it come in the box and just thought why not?" said Rooney. "Thankfully it went in the top corner. Nine times out of 10 they go over the crossbar or wide. I've not scored an overhead kick since school."
City, who had managed just one league win at Old Trafford in their previous 26 attempts, began the match in confident fashion and Silva should have scored in the opening minutes when he prodded a good chance fractionally wide of the post after being teed up by the livewire Carlos Tevez.
United, who suffered their first league
