Vivianne Miedema’s first-time effort just before the half-time break proved to be the difference, with neither side able to carve out many clear-cut chances.
One major positive for Nick Cushing’s side was the 30-minute cameo of England forward Ellen White, making her debut after a lengthy injury lay-off.
However, despite hers and the team’s best efforts, City were unable to find a breakthrough and were edged out of a tight encounter at Meadow Park.
Both teams were seemingly settled on getting the measure of each other in a cagey opening 15 minutes, with the only real chance seeing Arsenal forward Miedema find a pocket of space on the edge of the box in the 12th minute.
But her shot on the turn was never going to trouble Ellie Roebuck, sailing harmlessly over the bar.
City began to find their feet in the game as the half hour mark approached with Janine Beckie firing just over following good linkup play with her strike partner Georgia Stanway on the counter.
We also continued to hold firm at the other end with Jill Scott and Caroline Weir in particular upsetting the rhythm of the Gunners’ swift build-up play.
It remained a case of which side would blink first, with Beth Mead almost seizing the initiative for the hosts in the 35th minute as she looked to intercept a pass in the box from Gemma Bonner.
Thankfully, Roebuck was quick off her line to mop up the danger and preserve the clean sheet.
However, after firing that initial warning shot, the Gunners eventually broke the deadlock on the stroke of half-time.
Last season’s Super League top scorer Miedema was fed through expertly by Kim Little on the edge of the box and, despite the best efforts of captain Steph Houghton and the onrushing Roebuck, the Dutch forward drilled a near-post strike into the back of the net.
Arsenal almost doubled their lead early in the second half, but Bonner’s expertly timed sliding challenge prevented Miedema from bearing down on goal.
And, with the game seemingly reaching a plateau, Nick Cushing rolled the dice.
On came Megan Campbell, Pauline Bremer and, for her City debut, Ellen White within the space of five minutes just after the hour, replacing Matilde Fidalgo, Beckie and Tessa Wullaert respectively.
But it was last season’s WSL holders who continued to look the more likely to score, Campbell putting her body on the line to block Jordan Nobbs’ powerful drive towards goal.
The hosts had one final chance to double their lead in stoppage time, but the England midfielder spurned a golden opportunity, firing wide after being sent through one-on-one by Miedema.
The result will obviously come as a disappointment to Nick Cushing’s side, who could have gone six points clear with victory at Meadow Park.
Nonetheless, given the quality and intensity of the opposition on the day, the fact we were in the game throughout is testament to the heart and battle that was on show from the entire team.
How we lined up
Ellie Roebuck began between the sticks, screened by a back four of Demi Stokes, Bonner, Houghton and Fidalgo, making her first league start for City.
In front of them, Weir slotted into central midfield alongside Scott with Lauren Hemp and Wullaert on the flanks.
And finally, Beckie and Stanway – back in the starting 11 after a six-week injury lay-off, were at the sharp end of the team.
What it means
The defeat means Manchester City’s unbeaten start to the season is over, and we have dropped down to second place in the process. We are level on points with Arsenal a the top of the WSL tree, but have been leapfrogged by the Gunners following Sunday's 1-0 loss.
It’s a similarly stern test for Nick Cushing’s side this Wednesday, as they face an away trip to Atletico Madrid in the second leg of our Champions League last 16 showdown after a 1-1 draw at the Academy Stadium.