Highlighted as one of a number of difficult tests in the remaining weeks, the defending champions – inspired by a superb Kevin De Bruyne – opened a two-goal lead through a Raheem Sterling brace and despite a late scare, Gabriel Jesus wrapped up the points in the 90th-minute.
With Liverpool beating Chelsea 2-0 immediately after, the Merseysiders reclaimed pole position within two hours as this fascinating title race continues.
City started as they meant to go on, dominating possession with clean, crisp passing with Palace pinned back in their own final third.
And the goal the opening dominance deserved should have come on 10 minutes when David Silva cleverly rounded his marker in the box before crossing into the six-yard box where Sterling looked certain to tap home, but the England winger put his shot wide.
But Sterling soon made amends by putting City ahead just five minutes later.
It was a goal made in Belgium as skipper Vincent Kompany won a challenge on the edge of his own box and his clearance was cushioned down by Ilkay Gundogan to De Bruyne who edged forward before playing a superb pass into the path of Sterling who out-paced his marker before finishing emphatically past Guaita.
It was his 20th of another impressive season and the lead the defending champions fully merited - but neither he or City were finished yet.
The Blues were in full control, but looking for a second before the break and both Sergio Aguero and the lively Leroy Sane went close to doubling the visitors' lead with decent attempts.
On the stroke of half-time a lofted Gundogan pass caused panic in the home defence and when a loose ball fell to De Bruyne he looked certain to score, but his effort was straight into a crowded six-yard box and and Palace escaped with a corner..
Though the two teams walked off with only a goal separating them, Palace were well aware they were lucky to still be in the contest.
City went close again just four minutes after the re-start as De Bruyne’s dangerous low cross was deflected towards his own goal by Palace defender Martin Kelly with Sane waiting to convert, but Guaita collected on the line.
The Blues continued to dominate and whenever a Palace player did threaten a counter, there was a posse of sky blue shirts surrounding them with De Bruyne, Aymeric Laporte, Gundogan or Kompany in particular cutting out a number of threats.
And on 64 minutes, City finally doubled the advantage.
Aguero’s pass through to David Silva saw the Spaniard check and play the ball back to Sane whose low cross was hit first time by Sterling to wrong-foot Guaita and a defender and roll into the bottom corner.
It was just what the doctor ordered and gave the score-line a more realistic feel and some much-needed breathing space.
Yet from a position of complete comfort, a free-kick conceded on the edge of the box on 81 box allowed the home side to half the arrears as Luka Milivojevic found a gap in the wall to score.
Anything other than a City win would have been cruel in the extreme, but with the home support suddenly in full voice, the Palace players looked re-energised and a nervy end to the game beckoned.
But the champions gradually resumed control, killed the game for a few moments in the corner and on the last counter-attack of normal time, sealed the three points as the superb De Bruyne powered forward before sliding a pass to Gabriel Jesus who made no mistake with a low left-foot shot.
It was the end of the game as a contest and now the Blues will turn their sights to Wednesday and yet another huge game against Spurs.
Hard work rewarded
It wasn’t just City’s intelligence on the ball at Selhurst Park that impressed – it was the endeavour and hard work to win it back when Palace were in possession that ensured the home side never really got going.
The dangerous Wilfried Zaha was allowed little or no time to create the havoc is capable of and was often surrounded by two or three men when he did receive the ball.
It was a professional, committed display from start to finish from a team who looked determined to banish the memory of the 3-2 loss to the Eagles at the Etihad Stadium last December.
What it means…
City remain two points behind Liverpool having played one game less.
Star man: Kevin De Bruyne
Two assists - one with maybe the pass of the season - and lots of important foot-ins to break up Palace attacks, this was KDB at his imperious best.
City host Tottenham in the Champions League quarter-final second leg at the Etihad Stadium on Wednesday before again hosting the North London side in the Premier League next Saturday afternoon.