Goals for Leicester from Marc Albrighton and Ricardo Pereira see Guardiola's men slip seven points behind Liverpool.
PIC: Manchester City suffered a second successive defeat this season. (AFP)
BOXING DAY ENGLISH PREMIER LEAGUE
Pep Guardiola refused to concede Manchester City's Premier League title defence was over and urged his side to respond from a third defeat in their last four Premier League games after losing 2-1 at Leicester.
Goals for Leicester from Marc Albrighton and Ricardo Pereira saw Guardiola's men slip seven points behind league leaders Liverpool and down into third in the table behind Tottenham.
Yet Guardiola saluted the performance of his players so far this season and tipped them to remain in the title race with Liverpool, who City host on January 3, and Spurs if they match the number of points they have accrued in the first half of the season.
"Today we have finished the first half of the season and we have an incredible amount of points," said Guardiola.
"In a normal situation we are fighting to be champions. If we make the same number of points in the second part of the season we are fighting to win the Premier League.
"But the reality is there are another two teams and they are better."
Guardiola admitted, however, that his side's confidence had been dented by defeat at Chelsea in early December followed by back-to-back losses against Crystal Palace and Leicester.
"Good results make miracles in the mind," he said.
"All the game is in the mind. We are the same ones, we practise the little details the same as we have done during three years together.
"So now there will be doubts but what we have to do is try to change the dynamic to win games and make good performances.
"But we are able to do that. I never doubt them. With the joy and pleasure in how many things they have done in the recent past - not a long time ago - I will never doubt them.
"I have to reflect and think about what the team needs and how to help them."
'Seven points a lot'
City had gotten off to the perfect start when Sergio Aguero on his return to the starting line-up for the first time in a month teed up Bernardo Silva to open the scoring.
However, Albrighton quickly levelled and for all of City's possession, it was Ricardo who produced the one moment of quality with a rising drive into the far corner nine minutes from time.
"Seven points to Liverpool is starting to be a lot. We are not playing as well as we want at this part of the season. We have to find an explanation," said Silva.
"We have lost two games that we shouldn't do if we are in a race for the title. There are a lot of games left and it's mathematically possible but we have to be almost perfect from now."
A bad day for City was compounded by a late red card shown to Fabian Delph for a high follow-through on Ricardo after he had successfully won the ball.
The England international now faces a three-match suspension at a time when City are short of options at left-back, where the midfielder has again been deputising for the injured Benjamin Mendy.
"I'm pretty sure he touched the ball," said Guardiola. "But it was a red card and we have to accept that."
Claude Puel saw his Leicester side beat the defending champions just five days after also stunning Chelsea at Stamford Bridge.
And the Frenchman insisted those six points helped justify his heavily-criticised team selection in a League Cup quarter-final loss on penalties to City just eight days ago.
"People sometimes don't understand why we rotate," said Puel, whose side move up to seventh.
"You can't keep a high level keeping the same team every three days.
"It was possible here because we rotated in the cup game.