Salomon Rondon cancelled out Sergio Aguero's early opener just after the hour mark before Matt Ritchie sealed a 2-1 victory from the spot 10 minutes from time.
The reverse was City's fourth Premier League defeat this season, three of which have come in the last seven games in a run that has allowed Liverpool to cut loose at the top.
Jurgen Klopp's men can go seven points clear with a victory against Leicester City on Wednesday, and Pep recognises his men face an uphill task to retain their crown.
"It is difficult. We have a chance to do it but we need to win our games,” Guardiola explained to reporters.
“The advantage is not there but we need to continue. We have to do our games and know what we have to do.
“You can lose. Football is competitive.
"We had a chance today to reduce the lead. Tomorrow is a game for our opponent. When you are behind you have to win games and we couldn't do that.
"I know the challenge is big, being in all competitions is what it is. If you want to go up as a club you have to accept that challenge. I prefer to be in that position."
The former Barcelona and Bayern coach held back from criticising his beaten charges, however, instead preferring to highlight all they have achieved together in the past few seasons.
"I love these players," he added. "They gave me all the prestige I have in England. I will try to be here to help them. I know how they feel right now and I am beside them, close to them. It is an incredible group of players.
"Did we underestimate Newcastle? Never. We are in four competitions because we never underestimated one competition or team - never. We have done 100 points [in the league last season] because you never underestimate one team. If you don't you are not in the final of the Carabao Cup.
"Sometimes we don't play at the level we want to play, sometimes it happens."
City will be back in action at the weekend, with Arsenal travelling to the Etihad Stadium on Sunday.