A much-changed Foxes side faced Pep Guardiola’s holders for the second time at this stage of the competition in as many years, having also been beaten in a shootout at Filbert Way last term.
Man City went ahead in the tie with just 14 minutes on the clock, as Belgian international midfielder Kevin De Bruyne – making his first start since 1 November – found the bottom corner with an effort from the edge of the box.
Winger Demarai Gray nearly hauled Claude Puel’s men level shortly after, but his low strike was tipped wide by young Swiss shot-stopper Arijanet Muric.
Then, just before the break, Nigeria international midfielder Wilfred Ndidi had an effort blocked by Spaniard Brahim Díaz.
After the interval, Puel brought on James Maddison and Marc Albrighton in quick succession and it was the latter who would score a brilliant equaliser with 17 minutes play.
Ndidi floated a ball in between Kyle Walker and Oleksandr Zinchenko and found Albrighton, who took a touch before hammering past Muric – Puel celebrating passionately on the touchline as Albrighton was mobbed by his team-mates.
Two superb tackles from Academy graduate Hamza Choudhury ensured the tie would go to penalties, as he first dispossessed substitute Gabriel Jesus in the City box before halting the run of the Brazilian in injury time.
City’s third penalty shootout in four Carabao Cup fixtures this term, however, ended in defeat. Harry Maguire, skippering the Leicester side for the first time, scored the opener, but Christian Fuchs lifted his effort from 12 yards over the crossbar before Maddison and Çağlar Söyüncü were denied by Muric.
İlkay Gündoğan, Jesus, and Zinchenko were all on target for Man City, with England international winger Raheem Sterling the only man to miss for the visitors.
Major moment
A perfectly-weighted pass from Wilfred Ndidi and a lovely finish from Marc Albrighton produced a deserved equaliser for the Foxes.
While they would eventually exit the Carabao Cup on penalties, a lot can be said for the way they showed their fighting spirit to draw level at King Power Stadium.
With a tough run of Premier League fixtures on the horizon, they will once again need to show that battling character.
Who impressed?
Against some of the most talented footballers in England, Academy graduate Hamza Choudhury put in an outstanding display against Manchester City on Tuesday.
A indefatigable presence in central midfield, Choudhury’s challenges on Brahim Díaz, Oleksandr Zinchenko, former Fox Riyad Mahrez and Gabriel Jesus earned him plenty of plaudits.
With an Emirates FA Cup clash with Newport County fast approaching, alongside a flurry of Premier League fixtures, the 21-year-old may again be called upon by manager Claude Puel.
Coming up…
For Leicester City, attentions now turn to the Premier League. They next face Chelsea at Stamford Bridge on Saturday (3pm GMT kick-off), before hosting Manchester City at King Power Stadium on Boxing Day (3pm GMT kick-off).