Fernandinho then made it 3-1 to City, but Walcott found the net again on 63 minutes to reduce the deficit for the Gunners.
Further goals from David Silva and Fernandinho gave the hosts ample breathing space, while Per Mertesacker's late header counted for nothing as Yaya Toure sealed the win from the penalty spot in the final seconds.
Sports Mole takes a closer look at the action between the two sides in what was an exciting encounter in the North-West.
On target 7
On target 6
Was the result fair?
While Arsenal enjoyed good spells of play at the Etihad Stadium, it was the hosts who dominated for large periods and rightly came away with the points. There were occasional moments of worry for City, but they were too good going forward and made the visitors pay when it mattered with some ruthless finishing.
Man City's performance
Despite conceding three goals, Manuel Pellegrini's side looked unstoppable up front as they tore Arsenal to shreds throughout. The link-up play was a joy to watch, turning defence into attack at the drop of a very expensive hat, while the clinical edge that they showed in the final third was enough to send shivers down the spine of the rest of the Premier League. This was free-flowing football at its best and it will take some stopping for City not to regain their crown based on this display. If there was one area of concern for Pellegrini then it will be the sloppiness that the City backline showed once or twice during a crazy afternoon at the Etihad Stadium, though it is hard to pick too many faults in what was a commanding showing.
This was as erratic as Arsenal have been this season as they negated some crisp attacking play with a lethargy in defence and midfield. They switched off once too often against a buzzing City attack and were made to pay the price in embarrassing fashion. It was not all doom and gloom - they had a good footing in the match at 1-1 and 2-3 - but too many key players went missing on the day. Mesut Ozil and Aaron Ramsey in particular were well below par, though Theo Walcott's return to the starting lineup with two goals provided something of a dull gloss for the Gunners. Is this the start of the bubble bursting for Wenger's men? Only time will tell.
Sports Mole's man of the match
Fernandinho: The Brazilian was a colossus in midfield for City as he covered every blade of grass with such energy that it looked as if he could have played on for another 90 minutes. The summer signing was also rewarded for his display with two fine goals.
Jack Wilshere could find himself in trouble with the authorities for appearing to make an offensive gesture towards the Manchester City fans as Arsenal frustrations grew in the second half.
It was not one of Martin Atkinson's strongest days as the man in the middle was too quick on a number of occasions to blow up for petty fouls. However, he refused to let the game boil over despite the high stakes involved.
Man City: The Blues return to League Cup action on Tuesday when they travel to Leicester City in the quarter-finals.
Arsenal: The Gunners continue their Premier League campaign a week on Monday when they welcome Chelsea to the Emirates Stadium.