City started as firm favourites but came out second best against a fiercely determined Lyon in a game that swung on controversy and uncharacteristic errors in the closing stages.
Lyon went ahead in the 24th minute with Maxwel Cornet’s smart finish but City, lifeless as Guardiola chose to play a three-man central defence, looked to have been revived by Kevin de Bruyne’s precise strike from Raheem Sterling’s pass after 69 minutes.
Former Celtic striker Moussa Dembele, on as a substitute, restored Lyon’s lead in contentious circumstances 11 minutes from time, the video assistant referee ignoring what appeared to be an obvious foul by the goalscorer before he ran on to beat Ederson.
City pressed for the equaliser but Sterling was guilty of an atrocious miss, somehow sending his finish over the top of an open goal from Gabriel Jesus’ pass.
It proved to be hugely expensive as seconds later Lyon set up a semi-final meeting with Bayern Munich when Dembele scored his second after Ederson fumbled a shot from Houssem Aouar’s routine shot.
Guardiola must take responsibility
Guardiola has rightly been showered in plaudits for the wonderful football and success he has brought to Manchester City – but his biggest target remains elusive and this was a miserable night for the manager.
Guardiola, who has been accused of over-thinking his approach in the Champion League before, adopted a three-man central defensive system and chose to leave many of City’s creators and manipulators on the bench.
Lyon deserved respect after eliminating Juventus but this was a ploy that took it too far and resulted in a stuttering City lacking urgency and creativity.
He eventually introduced Riyad Mahrez after the break to some effect but Lyon were offered hope and encouragement by Guardiola’s approach and showed magnificent grit and resilience to secure the win.
City will rightly claim an injustice over the VAR decision that did not penalise what appeared to be a foul on Aymeric Laporte by Dembele but the team defending for the second goal was horrific, with every City player bar keeper Ederson in the Lyon half when the goal was create when the game was finely balanced at 1-1.
City and Guardiola have suffered Champions League disappointment before but this may hurt more than any other – and make no mistake, the much-feted Catalan must take his full share of responsibility for a flawed game plan.