Gabriel Jesus gave City an early lead, but the Swiss champions fought back with goals either side of the break to give their travelling fans a night to remember.
On an evening when Spurs were knocked out by Juventus, it was a timely reminder that we are now reaching the business end of this competition.
City, with six changes from Sunday’s 1-0 win over Chelsea, wasted no time in taking command of this second leg tie.
All week the players and manager have been underlining there would be no room for complacency, despite the 4-0 lead achieved in the first leg,.
And with just eight minutes on the clock the Blues were ahead and seemingly on course.
Leroy Sane, who seems to be saving his best form for the final weeks of the campaign, burst past two or three challenges before sliding the ball to Bernardo Silva whose threaded low cross was tapped in at the far post by Jesus.
It was the Brazilian’s 11th goal of the campaign, his first for nearly four months and he looked more than a little emotional as he sank to his knees in celebration.
Four minutes later and Sane nearly claimed another assist as he crossed low for Bernardo, but the Portugal star somewhat scuffed his shot in the six-yard box and the danger was cleared.
Moments later Bernardo’s deft cross found Ilkay Gundogan with just the keeper to beat, but his shot was well held by Tomas Vaclik.
It was open, fast and entertaining football, played against the backdrop of 2,000 or so loud and colourful Swiss fans.
And it was the visitors who were celebrating on 17 minutes when poor marking saw the ball fall to Mohamed Elyounoussi inside the box and his crisp low shot gave Claudio Bravo no chance.
It wasn't exactly a surprise and it gave the visitors renewed belief.
The Blues were looking dangerous with every attack and just before the half-hour, almost re-took the lead as Sane danced away from the keeper before teeing up Gundogan but again the German couldn’t take advantage.
Basel looked lively on the break and there were one or two nervy moments at the back for a defensive quartet playing their first game together, but the teams went in level at the break.
The second-half began with both teams giving the ball away frequently, much to the frustration of Pep Guardiola who demands perfection from his troops.,even if his starting XI had a slightly unfamiliar look about it.
The Blues might not have been at their best, but they were up against a Swiss side determined to restore some pride - and on 72 minutes, the near-50,000 Etihad crowd were stunned into silence as Elyounoussi's clever reverse pass was hammered home by Michael Lang to give the visitors a shock lead.
City toiled in the time that remained, but couldn't find a way back into the game which, thankfully, was wrapped up in the first leg.
Onwards and forwards for the Blues who resume their title bid next Monday and can now look forward to the quarter-finals next month.
Missed opportunities to increase the lead with the score at 1-0 allowed Basel a way back into the game on the night, if not the tie overall.
City Matchday App star man: Sane
What it means…
Even the most pessimistic City fan wouldn’t have thought this would be anything other than a passage into the quarter-finals for the Blues!
With a comfortable lead from the first leg, City needed to see the job through to ensure a place in the last eight of the competition for only the second time.
Now, we await the identity of our opponents with the draw being made on 16 March.
Liverpool, City, Juventus and Real Madrid are already through? The remainder will be decided next week.
City travel to the bet365 Stadium on Monday to face Paul Lambert’s Stoke City.
With Manchester United and Liverpool facing each other on Saturday, it could be a chance to either restore the 16-point lead at the top or – should that game end in a draw or a Liverpool victory – extend the lead further.
Then, it’s off to Abu Dhabi for a spot of warm weather training ahead of the international break before Everton on 31 March.
Stats and milestones
Despite defeat, City set a new passing record in the Champions League with 978 against Basel.
The loss was the Blues' first on home soil for 36 games and also ends a 13-match winning sequence at the Etihad.
Gabriel Jesus' goal was the Blues' 100th in the Champions League.
The Blues are yet to win both legs of a UCL knockout round match.
This was FC Basel's sixth win over English opposition - only Real Madrid, Bayern Munich, Juventus and Barcelona have more - decent company...