The Italian substitute won the spot kick himself, after a clear foul by the veteran Spurs defender Ledley King, and calmly wrong-footed goalkeeper Brad Friedel as he converted into the bottom left-hand corner.
To make matters worse for Spurs, who now trail City by eight points, seconds earlier they had looked like scoring a winner of their own.
Gareth Bale sprinted away from the home defence and crossed for Jermain Defoe who, at full stretch, could only turn the ball wide of the target.
And the deciding goal capped a remarkable second half which featured four goals in nine minutes - Samir Nasri and Joleon Lescott for the home team before Defoe and Bale brought Spurs level.
After 55 minutes, David Silva collected the ball just inside the Spurs half and suddenly found the necessary space to advance and thread through a pass for Nasri to convert an unstoppable first-time shot from just inside the area.
Within minutes, Silva had won a corner, taken on the left by Nasri and flicked on by Edin Dzeko at the near post.
The ball was met by Lescott who tussled with Scott Parker and converted into an open goal in the process of falling over.
It was a slightly bizarre way to take control of such an important contest but nothing compared with the manner in which Spurs dragged themselves back into the game.
A long clearance from Younes Kaboul on the hour forced centre half Stefan Savic into a disastrous backwards header which was intercepted by Defoe who controlled the ball on his chest as he rounded Joe Hart and rolled the ball into an empty goal.
It took all of four more minutes for Spurs to draw level as Aaron Lennon ran at Micah Richards before squaring to the unmarked Bale who placed a magnificent 22-yard, left-foot shot over Hart and into the top right-hand corner of the City goal.
It was a stunning sequence of events after a disappointing first half. The stakes, and the tension, were high in the opening exchanges with Bale, operating on both flanks in the first half, appearing capable of creating problems.
But City started to click into gear themselves as the half progressed, Silva and Sergio Aguero in particular, and the latter scampered after a quickly-taken Gareth Barry free-kick, appearing to have been harmlessly shepherded out of the area by Kaboul only to somehow turn back an impressive pass which Silva hit narrowly wide of the mark.
Micah Richards showed grit and determination in winning the ball on the half hour and setting up Aguero for a shot which Friedel saved well with his legs,
Spurs were struggling even more than City to trouble the opposing goalkeeper, however, and when Lescott fouled Bale just outside the City area, the free-kick appeared to be in a promising position for the visitors, until they came up with a free-kick which saw Kaboul sky a hopeless shot high and wide.
The goals ensured the second half would be an entirely different proposition and, even after them, the contest was far more open.
First, City threatened from a series of corners before a 25-yarder from Luka Modric drifted over, Gael Clichy was forced to head over with Lennon about to connect with a Bale cross and Lennon himself worked open a shooting opportunity but could only fire tamely at Hart.
There was time for City substitute Balotelli to make his mark, being booked for a foul and then accidentally catching Parker in the head as the pair tangled before his incredible late contribution.