First-half goals from Trevor Sinclair and Darius Vassell and a late effort from Robbie Fowler meant it was blue heaven at Eastlands for City fans.
Yet before kick-off City appeared underdogs having picked up only one point from a possible 12 over Christmas and the new year.
That was in stark contrast to United, whose excellent form in the Premiership had lifted them into second place in the table.
But the electric atmosphere at the derby proved a great leveller, as City followed on from their early season draw at Old Trafford with their third home win in four games against their local rivals.
Patrice Evra and Albert Riera joined the select band of players who made there debuts in the Manchester derby.
Evra, who earlier in the week completed a £5million move from Monaco, was selected at left-back for the Red Devils. And Spaniard Riera, signed on loan from Espanyol, came in on the left side of midfield for City.
Andy Cole had an early chance for City and Wayne Rooney had a decent attempt at goal for United in a low key opening.
But the match exploded to life just after the half-hour mark when City took the lead.
Gary Neville's clearance was headed back towards goal by Stephen Ireland and Sinclair scored with an excellent shot low to the right of the goalkeeper Edwin Van der Sar.
Television replays later proved conclusively that the goal should not have stood because of an offside in the build up to the goal.
David James came to City's rescue with a dash from his line to thwart Rooney as he raced through on goal, before the hosts doubled their lead with another cool piece of finishing.
Sinclair headed on a cross and Cole laid the ball into the path of Vassell, who turned Mikael Silvestre before slotting the ball low to the left of Van der Sar.
City, with their tails up, were denied a third goal on the stroke of half-time when Van der Sar brilliantly tipped over Cole's drive from 25 yards.
United brought on Alan Smith at the start of the second half to reinforce there midfield, as Evra was taken off and John O'Shea dropped back into defence.
United's hopes of getting back into the game all but disappeared midway through the second half when Cristiano Ronaldo was shown a straight red card by referee Steve Bennett following a late challenge on Cole.
Ten-man United were handed a lifeline when Ruud van Nistelrooy scored his 18th goal of the season in the 76th minute.
Rooney and Ryan Giggs set-up the Dutchman, who fired a shot through the legs of Sun Jihai and beyond the unsighted James.
With United committed to all-out attack they left themselves wide open at the back and gifted Sinclair and Kiki Musampa chances to seal victory.
City were eventually rewarded with a third goal in the fourth minute of stoppage-time, when they caught United on the break and Vassell laid the ball back for substitute Fowler to smash home the eighth goal of his career against United.