Pierre-Emerick Aubameyang scored in either half of the semi-final as FA Cup holders City suffered a first loss at the national stadium in 10 appearances.
It was a bitterly disappointing way to end our defence of the trophy we won last May with Pep Guardiola's side denied by a resolute, determined Arsenal side.
With a formidable Wembley record behind them, City assumed the early control, dominating both possession and territory.
The game though suddenly turned on its axis as Arsenal seized control.
On 13 minutes there was a warning of the Gunners’ potent attacking threat with Alexandre Lacazette putting the ball in the net only to be adjudged offside.
Ederson then produced a fine block to deny Pierre-Emerick Aubameyang’s powerful strike after the Gabon striker had latched onto David Luiz’s through ball.
And on 19 minutes it was the Gunners who struck first, the striker latching onto an inviting cross from Nicolas Pepe and then skillfully switching feet before beating Ederson with the outside of his right foot in off the far post.
With City lacking our normal fluidity and rhythm, Arsenal sought to further capitalise.
Ederson more than made amends for his earlier lapse by leaping to intercept a Pepe cross with Lacazette waiting to pounce and the Brazilian keeper needed to be alert once again to tip Mustafi’s arcing goalbound header over the bar.
City needed to up the ante after the break and inspiration was almost instantly forthcoming.
With City going up through the gears, Arsenal keeper Emiliano Martinez then leapt low to keep out a fierce Mahrez after the Algerian cut inside from the right.
De Bryune was an ace of drawing us level as his whipped 25-yard free kick on the hour rippled the outside the Arsenal goal.
Out of nowhere however, Arsenal doubled their advantage on 70 minutes.
Aubameyang broke the offside trap and powered upfield as he latched onto Tierney’s chip before drilling a low shot past Ederson.
City's night was then encapsulated by the sight of Laporte's curling shot rifling back off the stanchion of the Arsenal goal.
"We didn't make a good performance, we were not ready enough. If you don't play for 90 minutes in a semi-final this can happen. We didn't play good, we are human beings. The opponent played good, sometimes it happens.
"The only regret is that we didn't play the first half like we played the second one. We had to change the setup but we couldn't do it."
Pep Guardiola’s players make a quickfire return to action on Tuesday when we resume our Premier League campaign away at Watford in our penultimate domestic game of the season.
With second place in the table already secured, it’s an opportunity to rebuild momentum.
Kick-off at Vicarage Road on Tuesday is 6pm.
CITY X1: Ederson, Walker, Garcia, Laporte, Mendy, Gundogan (Rodrigo 65), De Bruyne, D Silva (C) (Fernandinho 88), Sterling, Jesus, Mahrez (Foden 65)
Subs: Carson, Stones, Zinchenko, Cancelo, Otamendi, Bernardo
ARSENAL X1: Martinez, Mustafi (Holding 82), David Luiz, Tierney, Bellerin, Ceballos (Kolasinac 82), Xhaka, Maitland-Niles, Pepe, Lacazette (Torreira 78), Aubameyang
Subs: Macey, Sokratis, Smith, Willock, Nelson, Saka