City will take a slender lead to Spain after winning the first leg 4-3, with more of the same likely in eight days' time.
It was a game that had everything in a ridiculously entertaining 90 minutes at the Etihad.
City held a two-goal advantage on three separate occasions, but were pegged back each time by a Real Madrid side who refused to buckle on the night.
City couldn’t have asked for a better start with a goal inside two minutes to send a raucous Etihad wild on a bright, sunny evening in East Manchester.
Looking sharp and focused from the off, the ball was played out to Riyad Mahrez on the right and the Algerian waltzed past a couple of challenges before picking out De Bruyne’s superbly timed late run and the Belgian guided a low header past international team-mate Thibaut Courtois to make it 1-0.
But it got even better just nine minutes later.
Phil Foden carried the ball down the left before playing it back to De Bruyne who crossed into the feet of Gabriel Jesus who took full advantage of Alaba’s poor touch to slot the ball past Courtois and send the Etihad into raptures.
It was the start Pep Guardiola must have dreamed of.
The Spaniards may have been on the ropes, but City gifted a number of opportunities that were largely self-inflicted errors that could easily have been punished.
Madrid had shown enough intent to cause concern and on 33, Karim Benzema – playing like a man possessed – turned Ferland Mendy’s cross home with the deftest of volleys.
There were more thrills and spills, but no further scoring in a first half that fairly flew by.
The second-half began as the first had with City denied by a coat of paint with two minutes of the restart as Mahrez raced clear only to see his shot strike the post and Dani Carvajal blocked Foden’s follow-up.
It was a game you daren’t take your eyes off!
City’s two-goal advantage would last just three minutes as Vinicius Junior span off Fernandinho just inside his own half before racing towards goal down the left flank and eventually tucking a low shot past Ederson.
It was perhaps one of the greatest Champions League games the Etihad – or maybe any other stadium – had ever witnessed, and it was still far from finished.
For the third time in this thrilling contest, City went two goals clear in the tie when, on 74 minutes, Oleks Zinchenko cleverly cut inside a challenge on the edge of the box and was brought down.
The referee played the advantage and while a couple of Real defenders seemed to stop, Bernardo picked up the loose ball and thumped it into the top left corner to make it 4-2.
Back came Real Madrid.
A cross into the City boss saw the ball strike the arm of Aymeric Laporte as he went up for a header and the referee pointed to the spot – Benzema, in this form, was never going to miss and he impudently dinked the penalty home to make it 4-3 with 82 minutes on the clock.
City tried to restore that elusive two-goal lead in the time that remained and came mightily close to doing just that with a couple of back post crosses that Ruben Dias almost connected with, but nobody was complaining when the final whistle went and the teams left to a richly deserved standing ovation.
What it means…
With away goals no longer counting double, the bottom line is that City have a one-goal advantage going into the second leg.
“It was a good game of football, both teams have an incredible amount of quality players on the pitch with incredible personality to play.
“The result is what it is, we won and now we rest and then it’s Leeds and we are going to travel to Spain next week and try and do a good result."
It’s back to Premier League action this Saturday as City make the short journey over the Pennines to face Leeds United at Eland Road.
The match kicks off at 17:30 (UK).
Real Madrid: Courtois, Carvajal, Militão, Alaba (Nacho 46), Mendy, Valverde, Kroos, Modric (Ceballos 79), Rodrygo (Camavinga 70) Benzema, Vinícius Júnior (Asensio 88)
Real Madrid conceded twice in the opening 11 minutes of a Champions League game for the first time in their history.
At 21, Phil Foden is the second English player to score a Champions League semi-final goal before turning 22.
This was the sixth time Real Madrid have lost the first leg of a Champions League semi-final - they've failed to reach the final on any of the previous five occasions they've lost in the first leg.
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