Enzo Maresca's men desperately needed a victory at the City Ground to keep pace with the in-form champions, who have taken 27 points from a possible 30, but lost 3-1.
Man City slump to third straight league defeat against Forest
Manchester City suffered a third consecutive Premier League defeat at the hands of Nottingham Forest on Saturday, allowing Arsenal to stretch their lead at the top of the table to six points.
City had a mountain to climb after finding themselves 2-0 down in the 18th minute following goals from defender Jair Cunha and forward Liam Delap.
The visitors were much improved after the break and Rayan Cherki cut the deficit with an emphatic strike into the roof of the net.
But Delap restored Forest's two-goal advantage in the 73rd minute, rifling home with his left foot past the outstretched hand of Gianluigi Donnarumma to earn his side breathing room.
Forest manager Oliver Glasner sprinted down the touchline to celebrate with his team, who had not managed to score a single Premier League goal at home before Saturday.
City, who won their first seven league games under new manager Maresca, know that even if they close the gap to Arsenal, it might ultimately all be in vain.
The Etihad club are still waiting to discover their fate after being found guilty of more than 100 breaches of Premier League financial rules -- with a huge points deduction one potential punishment.
