An own-goal from City's Isaiah Dada-Mascoll gave the hosts an early lead, before keeper George Murray-Jones saved a Forest penalty to keep the hosts within touching distance.
Dan Ogwuru drew us level before the break, only for the hosts to score the winner in the 51st minute through Detlef Esapa Osong, securing the points for the Midlands side.
City came into the game with a seven-point advantage at the top of the U18 Premier League North table in search for a ninth league win in a row to provide further breathing room at the league's summit.
But it was not the ideal start for the City youngsters as Dada-Mascoll diverted Dale Taylor's cross into our own net, giving the hosts the lead with just under 10 minutes played.
It looked as though Forest would extend their lead when they were awarded a penalty in the 17th minute for a foul on Taylor, who stepped up to take the spot kick, only to be denied by Murray-Jones who kept the score difference to one.
City were then able to capitalise on Murray-Jones' heroics, drawing level just before the half-hour mark with Ogwuru poking past Forest keeper Aaron Bott from close range, which saw the teams go into the break with the score tied at one apiece.
However, just six minutes after the restart, City fell behind once again, with a defensive error allowing Esapa Osong in on goal to fire past Murray-Jones to restore the hosts' advantage.
Though dominant in possession, City struggled to trouble the Forest back-line, with the hosts enjoying the better chances throughout the game.
During the closing stages, Forest's defence was called into action, with some good saves from Bott denying the Blues and ensuring , Forest held out for victory.
HOW WE LINED UP
George Murray-Jones was given the nod in-between the sticks, behind of a defence comprised of Rico Lewis, Isaiah Dada-Mascoll, who makes his first appearance for the U18s alongside Max Alleyne and Matty Whittingham.
Nottingham Forest U18
Starting XI: Bott, Abbott, McAdam, McDonnell (C), Johnson, Hammond, Powell, Collins, Taylor, Nadin, Esapa Osong
Subs: Aker, Korpal, Barker, Thompson, Perkins
Manchester City U18
Starting XI: Murray-Jones, Lewis (C), Dada-Mascoll, Alleyne, Whittingham, Susoho, Mebude, O'Reilly, Ogwuru, Adam, Barrington
Subs: Smith, McNamara, Soda, Dickson, Ndala
WHAT IT MEANS
A defeat brings an impressive winning run of eight league games to an end for Ben Wilkinson's side.
However, results elsewhere mean that we still have a six-point advantage in the U18 Premier League North over Liverpool, whilst Blackburn Rovers are 12 points behind us with two games in hand.
The next time you will be able to catch the U18s in action will be against Wolves at the City Football Academy, with kick-off at 12:30 (UK) on Saturday 2 April.