Man United and Chelsea drop vital points, leaving Gunners two points clear.
Arsenal were left two points clear at the top of the Premier League table as rivals Manchester United and Chelsea both dropped vital points on Sunday.
Manchester City completed a first league victory at Old Trafford since 1974 and a season double over Manchester United with a 2-1 victory thanks to goals from strikers Darius Vassell and new signing Benjani Mwaruwari.
Chelsea then missed the chance to close to within a point of United after being held to a goalless draw by Liverpool at Stamford Bridge.
It was an important result for Liverpool, who moved into fifth place on goal difference, and were left just three points behind city rivals Everton, with a game in hand, in the race for the fourth and final Champions League spot.
But Arsenal can now extend their advantage at the top of the table when they face Blackburn Rovers on Monday.
There were poignant scenes before kick-off at Old Trafford as fans from both Manchester clubs respectfully observed a minute's silence in the week of the 50th anniversary of the Munich air disaster.
In all 23 lives, including those of eight United players from the celebrated 'Busby Babes', were killed when a plane carrying the team home following a European Cup tie against Red Star Belgrade crashed on take-off after refuelling at Munich Airport.
Vassell put the visitors ahead in the 25th minute when he scored from the second attempt following good work by Stephen Ireland and Martin Petrov.
And just before half-time Benjani, a transfer-window signing from Portsmouth, marked his City debut by flicking on Petrov's cross into the far corner, just beyond the dive of United keeper Edwin van der Sar.
It was the second time this season the Zimbabwean had scored against United, the first being for Pompey.
England midfielder Michael Carrick pulled a goal back in the second minute of stoppage time but it was too late to prevent a win which bolstered City's bid for a European place.
United assistant manager Carlos Queiroz said nerves had played their part in his side's defeat.
"We didn't play very well," he said.
"We did not have any tempo or inspiration early in the game. We were perhaps too anxious at the start, and that combined with a Manchester City side who showed good movement and were strong on the counter-attack."
Queiroz added United had paid a price for having so many players on international duty during friendly games earlier in the week.
"We had seven or eight players who played 90 minutes in a friendly during the week and every time they come back to us they are affected by it in the next game," he said.
"The team was affected by those who played for their national teams but of course we cannot use that as an excuse."
City's victory gave them a first league double over local rivals United since the 1969/70 season.
"We worked ever so hard today and didn't give them much space when they went forward," said City midfielder Dietmar Hamann.
The German was especially taken with Benjani's performance.
"He's done ever so well. He kept the ball well and worked hard. When we put the ball in the channels he was always chasing it and won a few free-kicks.
"He scored a great goal and it was a great debut for him."