The Saints were unbeaten in four games prior to this game and took the lead through Nathan Redmond.
The hosts thought they had equalised soon after when John Stones volleyed past Fraser Forster but, after some confusion, they goal was ruled out for offside.
City did eventually score an equaliser through substitute Kelechi Iheanacho but Pep Guardiola's side are suffering an unwelcome dip in form.
Redmond goal gives visitors half-time lead
Following a very tense opening 15 minutes, the hosts carved out the first chance when Raheem Sterling almost connected with a Fernandinho cross.
The Saints stunned the Etihad soon after when a mix-up between Stones and Vincent Kompany allowed Redmond to round Claudio Bravo and slide the ball into an empty net.
Stones was keen to redeem his mistake and thought he had equalised just before half-time. The former Everton defender volleyed home following a free-kick but, after some confusion, referee Mark Clattenburg disallowed the goal due to another City attacker being offside.
Iheanacho off the bench to salvage a point
Guardiola withdrew the strangely ineffective Kevin De Bruyne at half-time and replaced him with Nigerian youngster Iheanacho.
It proved to be an inspired change from the Spaniard as the forward needed just ten minutes to put his side level. Fernandinho found Leroy Sane out wide, and the German supplied for Iheanacho who found the corner of Forster's net.
Ilkay Gundogan almost completed the turnaround soon after but Forster's strong hand kept out the effort that was heading into the corner.
At the other end, Bravo did well to keep out a strong Charlie Austin drive, while Steven Davis lashed a half-volley wide from 25 yards.
Meanwhile, Sergio Aguero - heavily linked with a move away following a reported disagreement with Guardiola - headed over following Sterling's cross.
Th Argentine went close again with seven minutes remaining; surging through the Saints midfield and defence before dragging his left-footed effort wide. Southampton youngster Sam McQueen then found space in the left chaneel and clipped a cross towards the back post which Aleksandar Kolarov had to head behind a corner to prevent Austin from having an open goal.
David Silva summed up the closing stages of the game when he slipped just as he pulled his leg back to shoot - much to the delight of the jeering travelling faithful just next to him.
Guardiola will be worried by his side's recent form, including two home draws to teams that he would hope to beat, particularly if their bid to win the title is genuine. It doesn't get any easier for City either, with rivals Manchester United awaiting in the English Football League Cup. Claude Puel's Southampton host Sunderland in the same competition in midweek.