Robbie Keane rewarded our territorial dominance with the opener after 32 minutes, arrowing his drive into the top corner after Pascal Chimbonda's break down the left.
However, City got back into the game via a Stephen Ireland equaliser from close range that looked offside, Nedum Onuoha then headed home for 2-1 and a disappointing afternoon was compounded when Darren Bent's late 'goal' was ruled out by an offside flag.
"We wanted to come back (after PSV) and prove we're good enough - we did it for 55 or 60 minutes but unfortunately we didn't kill the game off and gave a chance for City to get back into the game," reflected coach Gus. "We're very disappointed.
"We had the chance to kill the game off and didn't do it, so we have to look at ourselves and make sure it doesn't happen again in the future.
"I was proud after PSV, we played well, kept a clean sheet for 120 minutes and lost on penalties.
"However, this is disappointing. The defeat is difficult to accept."
Gus Poyet was disappointed that we failed to kill off Manchester City having taken the lead on Sunday.