The Bluebirds 2-0 defeat to Brighton, coupled with victories for Watford and Hull, means things are a little tighter with 14 games remaining.
And despite the fact that Malky Mackay's men could be just two clear by the time they face Wolves on Sunday, Connolly insists things are still looking good.
"I certainly won't panic - we are still in a great position," he told the club's official website. "If you offered us this position at the start of the season, or offered any team our position they would have taken it.
"It happens to the best teams. Even Manchester United have lost games they should have won. In football it happens. Every week a team who are favourites to win lose games."
Seagulls keeper Tomasz Kusczcak was at his best to keep out the Cardiff attack and Connolly was full of praise for the role the former Manchester United shotstopper played.
"He made some very good saves," he said. "On another day we would have taken our chances and would have gone on to win the game. Unfortunately that didn't happen today.
"If the strikers don't score it is our job to keep a clean sheet but we didn't, so unfortunately we lost."