The former England right-back scored a spectacular effort, his first goal for the club, which was out of keeping in a match which for more than 70 minutes was devoid of any meaningful action.
Mills broke the stalemate when he galloped forwards to join the attack before thumping an unstoppable 30-yard shot past Everton keeper Nigel Martyn.
Darius Vassell sealed victory deep into stoppage time as City secured their first win in five League and Cup matches following a dip in form after an excellent start to their campaign.
But the defeat was another hammer-blow to Everton who remain bottom of the Premiership, a stark contrast to last season's fourth place which earned the Toffees a place in the final qualifying round of the Champions League.
They have won only once in seven league matches and, most worryingly, have scored only one goal in the Premiership.
City were forced to make two late changes with Claudio Reyna and Ben Thatcher ruled out through injury.
Stephen Jordan replaced Thatcher at left-back while Stephen Ireland was handed his first Premiership start in the centre of midfield.
There was some cheer on the injury front for City as Andy Cole returned after a three match absence - ironically all three games ended in defeat - as he resumed his strike partnership with Vassell.
Everton were without Mikel Arteta who was injured in Thursday's UEFA Cup victory against Dinamo Bucharest.
It was a dire opening half in which neither keeper was forced to make a save and there were only a handful of half-chances created.
City had slightly the better of the chances as Cole and Antoine Sibierski both had shots off-target while Vassell headed narrowly wide.
Everton's Leon Osman saw a looping header land on the roof of the net while Tim Cahill had a goal ruled out after being caught offside.
The second half started in a similar vein with both goalkeepers still redundant. Vassell will still be kicking himself for failing to control a pass in front of goal which would have given him a great chance to open the scoring.
Kiki Musampa fired well wide from the left of the penalty area when he ought to have crossed to team-mates who were far better placed in the centre.
Dutchman Musampa fired into the side-netting after 62 minutes, his last action of the game before being replaced by Lee Croft.
City were gradually getting closer to the Everton goal and Cole fired in a terrific shot from the right side of the box which again found the side-netting.
Then, with little over 18 minutes left came the breakthrough, as Mills scored his first goal for three years and only the ninth of his career.
He stormed forwards to join the attack and found the top corner with a stunning long-range effort.
It brought the match to life and Everton almost equalised instantly when Kevin Kilbane fired in an angled shot which City keeper David James did well to keep out.
And City might have added a second goal when Everton keeper Martyn made a great save to keep out Sibierski's close-range shot.
But at the death Everton almost equalised when David Weir's shot beat James and looked goal-bound until City captain Sylvain Distin came to the rescue with a spectacular goal-line clearance.
City sealed victory in the last minute when Joey Barton's superb diagonal pass released Vassell who poked a shot low to the left of Martyn.