Despite Jamie Vardy’s 17th goal of the season early on, Riyad Mahrez’s deflected effort, an İlkay Gündoğan penalty and Gabriel Jesus’ close-range finish sealed all three points for the hosts.
The home side, though, launched a continued assault on the Foxes' goal as they carved out several early opportunities with Mahrez proving to be particularly problematic for his former club.
Gündoğan, on the other hand, sent an ambitious long-range effort over inside just two minutes, while Ricardo Pereira was required to make a pivotal last-ditch intervention to stop Raheem Sterling.
Sterling ran at goal again shortly after, necessitating a vital block from Jonny Evans, as Manchester City continued to probe their second-placed visitors with increasing accuracy in the Manchester rain.
In the 12th minute, Kevin De Bruyne sent a thunderous low drive onto the base of the post, but the Foxes stood up to the challenge admirably, clearing their lines and looking to advance.
Mahrez was the creator again when he slipped in Gabriel Jesus on the edge of the six-yard box, but the Brazilian’s flick was tipped away initially by Schmeichel and then hooked clear by Wilfred Ndidi.
Despite absorbing all the pressure, though, it was Leicester who led after 22 minutes when Ben Chilwell’s pass was latched onto by Barnes, who immediately looked upwards towards the league's top scorer.
The England Under-21s midfielder spotted the run of Vardy in behind and located a gap in Man City’s backline to set the 32-year-old up to race in on goal and lob Ederson superbly, making it 1-0.
However, Mahrez’s deflected low drive levelled the scores on the half-hour before Gündoğan sent a penalty into the bottom corner, following a foul by Ricardo on Sterling, before the break.
The final moments of the first half saw Vardy’s glanced shot force Ederson into a decent save, but following the interval, it was Pep Guardiola’s men who asserted their dominance.
Mahrez fizzed an effort just wide, while Ricardo needed to make a last-ditch challenge to stop Jesus from converting De Bruyne's drag-back inside the area. Schmeichel, too, made several saves.
The Foxes continued to carry a threat on the counter, though, and Barnes was unlucky not to apply a more fulsome finish to Vardy’s low cross after evading the entire Man City backline.
Schmeichel made another excellent one-handed save to deny Mahrez in the moments which followed Barnes' opening before Jesus’ finish at the far post, following De Bruyne’s incisive pass, settled the clash.
City's defenders were kept busy on Saturday, but performed admirably against an in-form Manchester City side.
The performance of Riyad Mahrez will not have come as a surprise to the travelling Blue Army, but it was the Algerian’s 30th-minute equaliser which truly flipped the match on its head.
While Manchester City were already creating plenty of chances, to see one actually ripple the net provided the champions with the confidence to go on and secure victory.
Northern Irishman Jonny Evans impressed Gerry Taggart, who was co-commentator on LCFC Radio.
Speaking live on LCFC Radio at full-time, former defender Gerry Taggart said: "When you least expect it, Jamie Vardy always pops up with a goal and Kasper Schmeichel was very, very good.
"I think Jonny Evans stood up, did the best he could, and the score could have been greater if not for people like Jonny Evans in their back-four."
Where does it leave us?
Manager Brendan Rodgers consoles his players following Saturday's reverse at Etihad Stadium.
The Foxes remain in second place in the Premier League standings after 18 matches, 10 points adrift of leaders Liverpool and one above reigning champions Manchester City.
From their 18 matches so far, Leicester City have gathered 39 points, leaving them 11 clear of fifth-placed Sheffield United. Chelsea, meanwhile, are fourth on 29 points.
Midfielder James Maddison looks to get upfield and work an opening for the Foxes during the clash with Man City.
Jürgen Klopp’s Liverpool are the visitors to King Power Stadium on Boxing Day (8pm kick-off) before the Foxes travel to West Ham United on Saturday 28 December (5:30pm kick-off).
All times GMT.
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