United delivered a brilliant and thrilling late come-from-behind victory as Bruno Fernandes and Marcus Rashford swept Erik ten Hag's side to a ninth successive win.
The Reds are now only one point behind our fierce local cross-town rivals, and six points behind next weekend's opponents Arsenal to set up an unexpected surge for the Premier League title.
City have gone the same way as the league leaders, Liverpool and Tottenham in falling victim to ten Hag's juju and going down at Old Trafford in the face of this remarkable Reds renaissance.
A quickfire Fernandes strike, initially flagged offside, and a Rashford tap-in, flipped a tightly contested derby upside down after substitute Jack Grealish headed City in front.
United left the Etihad Stadium battered and bruised after a chastening 6-3 defeat but have lost only once in 19 games since then with ten Hag insisting lessons have been learned.
Eyebrows were raised at the Dutchman's team selection with Luke Shaw again selected as the left-sided centre back in direct opposition to Erling Haaland. Lisandro Martinez was surprisingly on the bench, so too Antony with starts for Fred and injury doubt Anthony Martial.
After Pep Guardiola's side had characteristically dominated the early possession, the first opening of the tie went the way of United. Fernandes flashed a shot wide from a difficult angle having picked out by Christian Eriksen in the box. Moments later, Fernandes was involved again when his lovely raking cross-field ball found Martial, but he was unable to trouble Ederson after incisive pressing from the Reds.
United magnificently shackled the almost anonymous Haaland as Fred, brought in for compatriot Antony, did a superb spoiling job on Kevin de Bruyne, forcing City's creative genius to the fringes with a couple of huge, crowd-pleasing tackles.
Ten minutes before half-time, it look as though United's threat had been rewarded with the opener. After another pinpoint pass from Bruno, Rashford burst clear and skipped beyond the advancing Ederson. But City's defence had backed up well and immediately cut off the angle to force Rashford wide and getting a block in.
United threatened again three minutes later with Rashford again at the heart of things. A beautiful one-two with Eriksen set the former free to find him one-on-one with Ederson but our in-form no.10 was again unable to convert as the Brazilian stopper stood firm to thwart Rashford's attempted dink.
Kyle Walker thumped narrowly wide from distance shortly before half time after a spell of neat and tidy City probing around our box.
If the first half was a compelling tactical battle, the derby - as expected - opened up with a number of fiery challenges flying in with the Old Trafford crowd whipped up into a frenzy.
Ederson saved well from Raphael Varane, even though the flag up was against the Frenchman, and Antony, on for Martial, put Nathan Ake under pressure to force a succession of corners.
There was more zip and purpose in both sides' play but City blinked first when de Bruyne tested our defence with a number of searching crosses in quick succession. Varane dealt with the first one but the ball was recycled to the Belgian who picked out Grealish, only just on for Foden, to steer home an unmissable header from six yards out.
United had half an hour to rescue their unbeaten run with Alejandro Garnacho soon summoned from the bench in an attempt to wrestle back a modicum of control.
Aaron Wan - Bissaka jinked his way through the City defence before he was closed down well, but the uplift in pressure finally told in the 78th minute albeit in slightly contentious circumstances.
Referee Stuart Attwell consulted with his assistant, and the pair decided the goal should stand after ruling Rashford had not interfered with play. Old Trafford erupted, Pep and City exploded and the stage was set.
With the visitors still reeling from the blow of what they felt was a sense of injustice, Garnacho's influence again proved decisive. Just four minutes further on, the young Spanish-born Argentine burst clear and saw his cross blocked. But the ball came back to him and he steered into the path of Rashford to fire in low under Ederson and wheeled away in delight at his 16th goal of an extraordinary season. Rashford has now scored in each of his last seven games in all competitions, eight in total, and has been on target in each of his last nine appearances at Old Trafford - the first Red to do so since Teddy Sheringham in 2000.
City inevitably piled on the pressure but were unable to muster even a shot in anger in response as United stood tall to hold out for a simply stunning, sensational victory.
Overall team performance: 8/10
United Faithful Man of the Match: Luke Shaw.