The Premier League's bottom club more than held their own during the opening exchanges at the Etihad Stadium on Saturday, but found themselves up against it when the assistant referee flagged for a foul by Fernando Amorebieta on Alvaro Negredo in the area.
There was undoubtedly contact - the centre-back's knee plunging into Negredo's back - but the fact that both players were looking skywards chasing a lofted ball meant any intent was questionable.
And Magath feels the resulting spot-kick, converted by Yaya Toure after 26 minutes for the first of his hat-trick, represented the point at which his side began to crumble against title challengers City.
"There was contact, sure, but I think it was the moment when we lost the game," the German said.
"For me it was not a penalty but the decision was (that it was).
"Until that point I think we were doing quite well, coming here with a win last week and we looked forwards to have a good result.
"That penalty was, at the moment, not a decision that we can manage.
"I think we lost confidence and after the second penalty we didn't play anymore."
Amorebieta - who earlier passed up the chance to equalise when unmarked from a Kieran Richardson corner - was also the guilty party for the second penalty, scored nine minutes after the restart, and received a red card for his reckless lunge on David Silva.
As he did before half-time, Toure netted from 12 yards before City ran riot.
Toure then completed his treble with a sensational long-range strike, with Fernandinho and Martin Demichelis completing the misery for a team that lies four points from safety with seven matches remaining.
On the back of last weekend's 1-0 win over Newcastle, Magath was deeply unhappy with the manner in which his side capitulated during the final half an hour.
Asked whether his side "gave up mentally", Magath replied: "Yeah, sure.
"We have to talk about the situation that we don't fight, not until the end of the game, because it's not correct - especially for our fans.
"They come to Manchester and they like us to win or make a good game, so we have to fight for 90 minutes, not only 60 minutes."