The Premier League title holders were handed the most difficult Champions League opener possible with a trip to the Spanish capital, but acquitted themselves well, with the scoreline still 0-0 at half-time.
Despite Jose Mourinho’s side have the bulk of possession and territory, the visitors went into the lead when Yaya Toure played substitute Edin Dzeko through to slot home.
City’s lead was short-lived however as Marcelo fired home from the edge of the penalty area, with the shot taking a deflection off Javi Garcia.
The Etihad Stadium side refused to give up however and went back into the ascendancy when a devilish Aleksandar Kolarov free-kick evaded everyone to nestle in Iker Casillas’ goal.
With the English team looking for a hard-fought victory, a late flurry by Los Blancos broke City hearts when firstly Karim Benzema fired home after a neat turn, and then Cristiano Ronaldo’s dipping effort beat Joe Hart in the 90th minute.
Roberto Mancini has admitted that he is disappointed with his side dropping too deep and berated the loss of Samir Nasri and Maicon to injury.
“We didn’t lose concentration,” the City boss told Sky Sports.
“We went too deep with the team. All it is, is a mistake.
“In this moment we are disappointed but I think everything has to be more strong in the future.
“We lose two players for injury – Nasri and Maicon.
“And we had a problem because we wanted to change Aguero because we wanted to attack more. Instead we should do this change,” he concluded.
Borussia Dortmund beat Ajax 1-0 in the other fixture in City’s group.