Goals from Wilfried Zaha and James McArthur handed the Eagles a two-goal advantage at the interval but City’s plight deepened when Marc Albrighton was sent off in the 56th minute.
In the final 10 minutes, Ruben Loftus-Cheek and Patrick van Aanholt added their names to the scoresheet before substitute Christian Benteke struck from the penalty spot.
Iheanacho was also called upon to scramble it off Ben Hamer’s line at the other end from a downward James Tomkins header, but Palace would soon make a breakthrough.
In the 17th minute, Yohan Cabaye spun on the spot and flicked it into McArthur, who found Zaha, before the twice-capped England international curled it deep into the bottom corner.
While the Foxes did initially recover well, Roy Hodgson’s hosts doubled their lead with seven minutes of the first half to go as Zaha laid it on for McArthur to drill it into the far corner.
With City having utilised all three of their allotted substitutions, Albrighton was adjudged by referee Mike Dean to have felled Zaha, the last man, 30 yards out from City’s goal.
After deliberating with his linesman, the referee ultimately elected to brandish a straight red card for the 28-year-old, who was playing at right back.
With nine minutes to go, Mamadou Sakho’s incisive pass found Loftus-Cheek, allowing the Chelsea loanee to sidestep Hamer and convert Palace’s third goal of the afternoon.
Following Van Aanholt’s cool finish from the edge of City’s penalty area, Harry Maguire was deemed to have bundled Benteke to the floor in the box, resulting in a 90th-minute spot-kick.
The former Liverpool striker stepped up and powered it home in the final act of a day to forget for the Foxes.
Albrighton's challenge came 30 yards away from goal.
While the decision to dismiss Marc Albrighton may cause debate, the consequences of City going down to 10 men cannot be questioned.
The Foxes had already exhausted all of their substitutes by that point, meaning those who remained on the field had to manage a difficult situation in front of a raucous home crowd in south London.
Where does it leave us?
Iheanacho cleared a Palace chance off the line in the first half.
City are ninth in the Premier League, four points behind Everton, following their 2-0 success at Huddersfield Town and three above Newcastle United, who were defeated 1-0 by West Bromwich Albion.
City have two games at home coming up in the Premier League.
West Ham United visit King Power Stadium on Saturday (3pm kick-off) before another home fixture against Arsenal the following Wednesday night (7:45pm kick-off).
For an as-it-happened account and match statistics, click HERE.
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