The young Foxes, who were denied a place in the FA Youth Cup semi-finals by Watford last week, went behind to a Fabio Carvalho strike in the 36th minute.
While Arlott-John levelled the scored in the 51st minute, latching onto Harrison Myring's assist, the Cottagers ended up sealing victory courtesy of Sonny Hilton's effort with 19 minutes to play.
As a result, City's youngsters drop down to eighth in the U18 Premier League South standings, with 20 points from 16 matches, ahead of the visit of Aston Villa on Saturday 16 March (11am GMT kick-off).
Meanwhile, in the Under-23s' 1-0 defeat by Manchester City on Sunday, two stars of the Under-18s side this season - Sidnei Tavares, George Heaven - appeared from the bench.
Luke Thomas, on the other hand, an enterprising left-back who has captained the Under-18s this season, added to his substitute appearances at Under-23s level with a maiden start for the Development Squad last month.
Starting in a more advanced position on the left wing to accommodate Calvin Ughelumba, Thomas played a key role in City’s goal, scored by Zimbabwe senior international Admiral Muskwe, another product of the Club’s Academy, during a 1-1 draw at Norwich City in the Premier League Cup.
One of three nominees for City’s 2017/18 Academy Player of the Season last May, missing out to eventual winner Conor Tee, Thomas was also named in an England Under-18s squad in November.
The details...
City: Stolarczyk (c), Kranthove, Husek, Elewa-Ikpakwu, Murch, Gyamfi, J. Gyamfi, Fitzhugh, Myring, James, Ewing, Arlott-John
Subs not used: Barrett, Sams, Russ
Goal: Arlott-John 51'