Pep Guardiola’s side fell to an 89th minute defeat after Kelechi Iheanacho converted the penalty he won after being tripped by Nathan Ake as the defender attempted to recover from being caught in possession.
The Nigerian striker fired emphatically past Zack Steffen into the top corner to win an even contest which looked certain to be settled via a penalty shootout.
City grew into the game at Wembley Stadium, where Leicester enjoyed the better of the opening 45 minutes and would have took the lead but for the outstretched boot of Steffen, who made a brilliant save to deny Jamie Vardy a certain goal.
Ilkay Gundogan had the best of the chances for the defending Premier League champions, forcing Kasper Schmeichel into an early save with a curling 20-yard free-kick, but blazed well over when the ball dropped for him 10-yards from goal into the second half.
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