The French outfit took a two-goal lead after 60 minutes with goals from Pierre Bourdin and Romain Habran but a late rally from City saw them score from the penalty spot and have several late chances to draw level.
Unfortunately for the Blues it was not their night and the Parisians finished deserved winners.
Celtic also tumbled out as PSV Eindhoven clinched a 1-0 victory.
In front of 5,000 fans at the Phillips Arena, Phillip Cocu's side edged a nervy game, with both teams desperate to get the three points.
A late goal from Joshua Brenet gave the home side a dramatic win, but Aston Villa's away win in Portugal means they will now have to wait to see whether they are one of the four best third place finishers.
Sporting crashed to a 1-5 defeat at the hands of Villa, who subsequently secured their place in the next round of the tournament.
The Villans played some exceptional football, and outclassed the Portuguese side throughout.
Two goals apeice for Graham Burke and Mikey Drennan and a fine strike from Donacien gave Villa a famous win against the Group Four leaders.
Liverpool produced a stellar performance against Borussia Dortmund to win 3-0 at Langtree Park.
A brace from captain Connor Coady and a second-half goal from Adam Morgan kept Liverpool's qualification hopes alive, and sent Dortmund out of the Series as they finish bottom of the group.
The Reds need to beat holders Internazionale in their next game to progress to the last 16.
Athletic thrashed Marseille 5-0 to boost their chances of qualification from Group Five.
The Spanish side looked comfortable throughout the tie and the three points means they now lie second in Group Six with two games left to play, one point off Marseille.
The French side will have to wait for the result between Arsenal and Athletic next week before they know whether they have qualified for the last 16.
Liverpool 3 (Coady 22, 26, Morgan 78) vs. Borussia Dortmund 0
Paris St Germain 2 (Bourdin 30, Habran 63) vs. Manchester City 1 (Lopez 77)
PSV Eindhoven 1 (Brenet 83) vs. Celtic 0
Wolfsburg 2 (Brandt 68, Uzan 90) vs. Anderlecht 3 (Dendoncker 14 Kabasele, 34, Heylen 37)
Sporting CP 1 (Santos 75) vs. Aston Villa 5 (Donacien 10, Drennan 4', 88, Burke 55, 78)
Athletic Club 5 (Santamaria 58, 80, Williams 65, Lopez 78, Corral 90) vs. Marseille 0