Rayan Cherki and Erling Haaland scored on either side of Kai Havertz’s equaliser in a high-intensity match that also saw the woodwork hit four times.
City can go top of the Premier League on goal difference if they beat Burnley on Wednesday.
Guardiola said: “We were not at our best. I give a lot of credit to Arsenal, but we are alive. We are there, everybody is pushing.
“We have a difficult schedule and we are not top of the league. So far they are the best team in England, but we have extended our chance to fight until the end.
“It was the two best teams in England. I think it was a good advertisement worldwide.”
He rejected the idea that City are now favourites: “If I say the momentum has changed, then you would say Arsenal have bad momentum — but after seeing them play like this, how is that bad?
“They’re in the Champions League semi-finals and haven’t lost a game there. Momentum can shift instantly. They know that.”
City are concerned about Rodri, who went off with a groin problem and will be assessed. Haaland also said Arsenal defender Gabriel could have been sent off for a headbutt.
Haaland said: “If I had gone down — which I won’t unless someone really attacks me — it might have been a red card.
“But it is what it is. There’s always a lot of fighting. I won that moment, and I’m happy.”
Arsenal manager Mikel Arteta said his team are still convinced they can win the title, despite only one win in their last six matches.
He said: “We’re very upset with the result. We came here to win. We prepared to take the game where we thought we could win it, and we did that. We showed we are capable.
“But the difference was in both penalty areas — that decided the game.
“I believed before and I still believe now. If the players needed more conviction, they have it now.
“It’s a new league now. They have a game in hand, we are three points ahead, and there are five games left. Everything is still to play for.”
Arteta also pointed to missed chances, including a shot that hit the post, as key moments: “The margins are very small. Sometimes it comes down to luck, timing, and execution. Those moments didn’t go our way.”