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The game was only three minutes old when City could and should have taken the lead through Nabil Touaizi.
Racing clear of the defence to latch on to Daniel Grimshaw’s clearance, the young forward rounded the ‘keeper only to hit the side netting with the goal gaping.
The game reduced to a slower pace after that, with City comfortable in possession, though clear-cut chances proved elusive.
That was until the 21st minute when another burst of pace down the left from Touaizi allowed him to cut the ball back to the onrushing Diaz, who made no mistake from close range.
From there City were in control and they almost made it two, only for Ed Francis’ fiercely struck free-kick to be deflected onto the bar by a Napoli defender.
With the attacking trident of Rabbi Matondo, Garre and Touaizi providing a constant outlet, the Welsh winger was the next to go close.
A typically precise through ball from Matt Smith set him free, but Matondo blazed over, when he had time to pick his spot.
Grimshaw’s goal had led a charmed life in the first period, but the Italian’s nearly levelled on the stroke of half-time.
Gianluca Gaetano carved himself a yard of space on the edge of the area and his curling effort looked set for the back of the net, but for the intervention of the scrambling 'keeper.
After the break, Napoli picked up where they left off, showing more attacking intent.
A recovery tackle from Francis denied Gaetano, but City conceded a minute later.
The opposition picked Smith’s pocket in his own half and while Grimshaw was out to meet Russo, the ball rebounded kindly for the striker, who tapped into an empty net to level.
But City only had to wait 10 minutes before their advantage was restored.
Overzealous marking from Giuseppe Esposito saw him haul Matondo down in the area and the referee was in no doubt as to the punishment.
Diaz duly obliged from the penalty spot, sending the ‘keeper the wrong way with his low effort.
An offside flag maintained the home side’s lead after Alberto Senese's header found the top corner, but the Blues went further ahead after Garre made it 3-1.
Touaizi, whose pace caused problems all afternoon, again rounded the ‘keeper and though a defender deflected his cut-back, the Argentine was on hand to seal the victory in the 65th minute.
As the clock ran down, Grimshaw was alert to deny the imposing Francesco Mezzoni, and Touaizi nearly got the goal his performance deserved only for the assistant referee to flag for offside.
Colin Rosler, Iker Pozo and Touaizi all came into the side for their first appearances in the competition this season.
Matondo and Garre provided width from the right and left respectively, either side of Touaizi in the striker's role.
A third win in three UEFA Youth League games leaves the young Blues on nine points, five points clear of Feyenoord in second place.
Trips to Naples and Ukraine beckon in the second round of matches, but Davies' charges have put themselves in a commanding position to qualify for the knockout stage of the competition.
The UEFA Youth League takes a two week break, with City next in action against the same opponents on Wednesday 1 November, for an away trip Simon Davies has identified as a tough test.
Premier League 2 action returns this weekend, as the Blues welcome Derby County to the Academy Stadium for an 11am kick off on Saturday 21 October.
Tickets for this game are on sale now, with Seasoncard holders and Cityzens Matchday members able to claim a free ticket.
The manager is expecting a continuation of his side’s impressive European performances.
The defender felt the young Blues let themselves down against their Merseyside rivals.
The EDS boss was left ruing the Blues’ profligacy in front of goal and felt their game management was not at the required level.