Ali Reghba deservedly put the Club's Under-23s ahead 10 minutes before the interval, but a strong Gunners side triumphed after two quick-fire goals from Tyreece John-Jules just after the restart.
City's starting line-up featured just one change from their 2-0 win at Wolverhampton Wanderers last month as defender Calvin Ughelumba replaced Sam Hughes, who recently joined Salford City on loan.
On a crisp yet pleasant afternoon in the capital, the Foxes started encouragingly with a high-press stratagem against a home side which had Konstantinos Mavropanos and Rob Holding among their ranks.
Firstly, with just two minutes on the clock, the visitors forced a corner and Wales midfielder George Thomas' out-swinger landed on Kiernan Dewsbury-Hall's head, although the 21-year-old nodded narrowly wide.
Leicester went close again on five minutes as the impressive George Hirst stepped up to take a free-kick on the edge of the penalty area, firing a low drive just the wrong side of Karl Hein's near post.
Midway through the opening half, left-back Luke Thomas, fresh from England Under-19s duty, galloped down the flank and crossed for Hirst, but the 20-year-old's header was saved point-blank by Hein.
City's youngsters were in control for long spells in the first 45 minutes and the only opportunity for Arsenal came just before the half-hour mark as Viktor Johansson parried Nathan Tormey's volley.
With 35 minutes on the clock, meanwhile, the Foxes took a deserved lead in the capital when Mitchell Clark slid the ball into Reghba in space before the Irishman powered it beyond Hein and into the net.
The Gunners may have felt unfortunate to go into the break behind after Rob Holding's header came back off the post, but their fortunes were about to improve, much to Leicester's frustration.
Firstly, within seconds of the referee's whistle, the hosts were level as Leon Balogun located John-Jules in space and the 18-year-old duly obliged to riffle a fearsome volley into Johansson's top corner.
Just five minutes later, the turnaround was complete for Arsenal as John-Jules again broke free of City's defenders and slotted home a tidy finish to make it 2-1 to the Gunners.
The visitors responded admirable to the set-back and began to sustain an effort to equalise, although they found Hein, Arsenal's goalkeeper, in fine form.
With little over 10 minutes to go, Dewsbury-Hall thought he had hauled his side level with a smart glancing header from Thomas' corner, but there was Hein to make an outstanding save.
At the other end, meanwhile, Balogun forced an outstretched save from Johansson in Leicester's goal, before his second attempt was swept off the line by Darnell Johnson.
Calvin Ughelumba is unable to prevent Tyreece John-Jules from getting Arsenal back into it.
Conceding their lead so soon into the second half was a blow to City's chances of returning to Leicester with points and handed Arsenal a major confidence boost at Emirates Stadium.
The Gunners rode that optimism to go and take the lead - with Tyreece John-Jules netting on both occasions - in a much-improved second half performance from the home side.
Young midfielder Khanya Leshabela stays close to his man in the centre of the pitch.
After impressing over the past fortnight on international duty for South Africa's Under-23s, midfielder Khanya Leshabela returned to deliver an expressive, yet controlled, midfield performance in London.
The 19-year-old's ball retention was typically sound and he also regularly found the feet of his team-mates in attacking positions as the Foxes looked to find an equaliser in the latter moments.
Where does it leave us?
Ali Reghba was on the scoresheet for the Foxes in London.
Leicester's Under-23s drop one place to eighth in Premier League 2 Division 1 with five points, following Manchester City's 2-1 defeat by Wolverhampton Wanderers, also on Saturday.
Liverpool are the visitors to Holmes Park as City's 2019/20 campaign continues with a Premier League 2 encounter against the Reds in Whetstone next Friday (7pm BST kick-off).
City: Johansson; Clarke (Daley-Campbell 62'), Johnson, Ughelumba, L. Thomas; Leshabela, G. Thomas (c), Dewsbury-Hall; Reghba (Eppiah 75'), Hirst, Muskwe (Wright 65')
Subs not used: Davies
Goal: Reghba 35'
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