A solitary second half David Silva goal sealed the win for the home side at the Etihad Stadium, and means that City move to 12 points clear of the North London outfit.
Wenger conceded that Arsenal needed to win to be in the hunt for top spot, and feels the gap to the frontrunners is too much to claw back.
“Unfortunately for us it was a game that we couldn’t afford to lose because it puts us too much [behind City],” he told the club’s official website.
“If we had won the game we would have come back to six points and with players coming back like our full-backs and [Jack] Wilshere and [Abou] Diaby – we will have a better squad in the second half of the season.
“At the moment we are too far behind.
“I think it was a game that could have gone both ways. It was very intense with both teams going for it and I feel as well that we were a bit unlucky.
“Their goalkeeper had a good game and we were a bit unlucky with the fact that we had to reshuffle completely at the back in a position where we are already short – we paid too much for that.
“Overall I did feel at half-time that we would win the game if we stayed stable at the back.
“We lacked a bit of accuracy with our final ball in the final third as well because we had a few opportunities where we didn’t pass the ball well.
“But overall we had a very positive performance, great spirit, quality, but we lacked a little bit of what is vital in the big games,” he stated.
By Gareth McKnight