City's 100 percent home record seemed about to end after Tottenham recovered from a two-goal deficit in a mad nine-minute spell midway through the second half.
The hosts had gone ahead in the 56th minute through Samir Nasri and doubled their lead three minutes later courtesy of Joleon Lescott's bundled effort.
Spurs got themselves right back in it with a Jermain Defoe goal on 60 minutes after a blunder by City defender Stefan Savic followed five minutes later by an exquisite Gareth Bale strike.
The visitors were a whisker away from grabbing all the points in stoppage time when Defoe went agonisingly wide with the goal gaping but City made the most of their chance at the other end when Ledley King brought down Balotelli.
The Italian substitute, who Spurs manager Harry Redknapp felt should not still have been on the pitch after appearing to stamp on Scott Parker earlier, converted calmly to send the packed stadium into raptures.
"It was an amazing game ... the first 45 minutes you had two teams that were looking at each other, it was very tactical," City assistant coach David Platt told a news conference.
But he added manager Roberto Mancini was far from happy over the way they allowed Spurs to get a foothold in the game.
"We managed to get our noses in front at 2-0 and the game really should be put to bed. He (Mancini) is not happy ... he's made that clear in no uncertain terms."
City moved to 54 points from 22 games, with second-placed Manchester United on 51. Spurs stay third with 46.
United made it another Manchester double over north London when they won a rather less dramatic but equally exciting game at the Emirates to leave Arsenal a distant fifth after a third consecutive league defeat.
The two Manchester clubs beat Spurs and Arsenal by a combined goal tally of 13-3 on the same weekend in August and United followed City's fortunate win over Spurs with goals from Antonio Valencia and Danny Welbeck sandwiched either side of Robin van Persie's equaliser for the home side.
Ryan Giggs provided the cross for Valencia to head home in the first minute of stoppage time, while Van Persie equalised with a low strike in off the post after 71 minutes.
Welbeck took advantage of some sloppy Arsenal defending to smash in the winner and complete a double after their 8-2 home victory over Arsene Wenger's side in August.
Spurs and City have met in the north west for the past two seasons with a Champions League berth at stake but this term the bar has been raised as the United-Chelsea-Arsenal domination of recent years has been challenged.
With two of the league's best passing teams meeting and two of the most potent midfields on show, there was little to choose between the sides in an absorbing first half even if clearcut chances were thin on the ground.
That all changed 11 minutes after the break when the lively David Silva set up Nasri who finished with a first-time strike.
Three minutes later Silva swept in a corner that Edin Dzeko flicked on towards Lescott in the box and the defender bundled both himself and the ball into the net to double City's lead.
While the home fans were still celebrating what looked like a match-winning lead, Spurs striker Defoe pounced when City defender Savic made a mess of a header intended for keeper Joe Hart.
The ball fell short and Defoe, who was starting in the absence of Emmanuel Adebayor who was ineligible to play against his parent club, rounded Hart to make it 2-1.
The Spurs fightback continued five minutes later when Luka Modric passed to Bale who curled his unstoppable first-time shot out of the reach of diving keeper Hart to level the scoreline.
City brought on Balotelli for Dzeko and the Italian soon found himself in the referee's book for a foul on Benoit Assou-Ekotto. He then seemed to stamp on Spurs midfielder Parker in an incident that referee Howard Webb did not see.
"Scott's got a lovely cut on his head," Redknapp told a news conference. "I don't like seeing people react like that ... It was wrong."
With Spurs fans thinking Balotelli was lucky to still be on the pitch, the Italian then tumbled over King's outstretched leg and then kept his cool in the fifth minute of added time to slot home from the spot and snatch all the points.
