United, who led through Javier Hernandez's early second-half goal, were pegged back by Demba Ba's controversial penalty which left Alex Ferguson's side four points behind City who play at Liverpool on Sunday.
"It was a shocking decision," manager Alex Ferguson told Sky Sports after defender Rio Ferdinand was penalised for a tackle on Hatem Ben Arfa. "It cost us."
Tottenham Hotspur, with a double from Emmanuel Adebayor, stayed third after coming from behind to win 3-1 at West Bromwich Albion while Chelsea emerged from their recent slump to give under-pressure manager Andre Villas-Boas a huge boost with a 3-0 victory over Wolverhampton Wanderers at Stamford Bridge.
Manchester City have 34 points, followed by Manchester United on 30, Spurs (28), Newcastle (26) and Chelsea (25).
Franco Di Santo struck a last-gasp winner to lift Wigan Athletic off the bottom with a 2-1 victory at Sunderland. Blackburn dropped to the basement after losing 3-1 at Stoke City in the lunchtime kickoff.
United have stumbled at home in this season's Champions League and after being held to a midweek draw by Benfica, they also found high-flying Newcastle tough to crack on their return to domestic action, even when the visitors were reduced to 10 men after Jonas Gutierrez's 79th minute dismissal.
A fine performance from goalkeeper Tim Krul was overshadowed by Newcastle's 64th minute equaliser when referee Mike Jones awarded a spotkick despite Ferdinand seemingly winning the ball fairly from Ben Arfa.
Ba dispatched the penalty, leaving an angry Ferguson to remonstrate angrily with the match officials.
United, who wasted a host of chances, were also denied by a late goalline clearance and had a goal ruled out for offside in stoppage time.
Chelsea, who had lost three of their previous four league games and their last two at home, cruised past Wolves after John Terry, Dean Sturridge and Juan Mata struck before halftime.
Spurs made it five successive league wins with a comeback success at the Hawthorns while in other matches, Everton won 2-0 at Bolton Wanderers and Norwich beat Queens Park Rangers 2-1.
