Mikel Arteta curled the ball inside the post in the 87th minute, allowing Arsenal to consolidate third place.
City had topped the table for most of the season but Manchester United has seized on its neigbhor's collapse over the last month to surge eight points clear with six games remaining.
Even United's 2-0 victory over Queens Park Rangers earlier on Sunday provided no incentive for City's players.
An indisciplined Balotelli received a second yellow card in the 90th minute for a second lunge on Bacary Sagna having also been booked in the first half.