Demba Ba opened the scoring in the first half with his 15th league goal of the season before Yohan Cabaye made it 2-0 in the 47th from a free-kick. A Phil Jones own goal late on made sure Newcastle stayed seventh and a point behind Liverpool.
United's third defeat in 20 matches so far meant they stayed second on 45 points, only three ahead of third-placed Tottenham Hotspur who have a game in hand.
"It's not the time to panic. We've got the experience to cope with it," said United manager Sir Alex Ferguson, whose team lost 3-2 to Blackburn on New Year's Eve.
Bolton Wanderers shocked Everton 2-1 away from home after Everton goalkeeper Tim Howard had given his side the lead with a freak kick from his own area.
Bolton, who moved move off the bottom to 18th place, equalised through David Ngog four minutes later with Chelsea transfer target and England defender Gary Cahill scoring the winner 12 minutes from time.
Howard's booming wind-assisted clearance bounced over opposite number Adam Bogdan and was only the fourth goal scored by a goalkeeper since the Premier League was formed in 1992/93.
Everton stayed 11th on 24 points with a game in hand on all teams bar Tottenham, while Bolton leapt above Blackburn Rovers and Wigan Athletic on 16 points, only one behind Queens Park Rangers and Wolverhampton Wanderers.
Senegal striker Ba, a revelation for Newcastle this season who will be sorely missed during the January 21-February 12 Africa Cup of Nations, wasted a great chance to put his side in the lead early in the first half but made amends with the brilliantly-taken opener.
After a long kick from goalkeeper Tim Krul that was flicked on by Shola Ameobi, Ba flicked the ball right-footed over Rio Ferdinand and United goalkeeper Anders Lindegaard into the far corner of the net on 33 minutes.
Better was to follow, when two minutes into the second half Cabaye unleashed an unstoppable free-kick. Then, with United laying seige to Newcastle's goal, defender Danny Simpson stopped a Wayne Rooney shot on the line to keep the two-goal advantage.
Former United player Simpson did exactly the same from a Javier Hernandez shot when the two sides met in the league in November to prevent a 2-1 home win.
United's miserable night was capped with added-time approaching when Jones took his eye off the ball following another huge kick by Krul and headed it onto his leg to wrong-foot Lindegaard.
"We've had such a great season so far without actually turning over one of the top teams. Today we had our best team out and it showed," Newcastle manager Alan Pardew told Sky Sports.
Ferguson conceded matter-of-factly that rivals City have the advantage in the Premier League title race.
"They won theirs last night and we lost ours, advantage to them of course."
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