While City's perfect start to the season was ended in Glasgow, their Premier League rivals Arsenal eased to a 2-0 victory against Basel.
Atletico had eliminated Bayern in the semi-finals last season and repeated the trick at the Vicente Calderon to make it a double for Spanish clubs against German opposition as Barcelona downed Borussia Moenchengladbach.
On paper, the Group C clash at Celtic Park appeared to be a bit of a mismatch with City looking to equal Tottenham Hotspur's English record of 11 successive victories at the start of a campaign from 1960.
Fernandinho equalised only for a Kieran Tierney cross to go in off Sterling and restore the Scottish champions' lead.
Sterling's brilliantly-taken goal at the other end restored parity before the half-hour mark, but Dembele capitalised on an Aleksandar Kolarov error to make it 3-2 just after the break.
However, Nolito got City's third equaliser and it was the English side who looked more likely to go on and win it.
It is Barcelona who are top of the section after the Spanish champions followed their 7-0 trouncing of Celtic last time out with a come-from-behind 2-1 victory over Gladbach in Germany.
Thorgan Hazard slotted the Bundesliga club in front in the first half but Arda Turan came off the bench to level after the break before Gerard Pique got the winner on 74 minutes.
"They put in a huge effort in the first half, but overall I think we were better and it is a deserved result," said Pique.
The Swiss champions have enjoyed excellent results in
European competition against English sides in recent years but a first-half brace by Walcott ensured it was a comfortable night for the Gunners.
"We had pace, technical quality and movement. My only regret is we didn't take all our chances," said Arsenal manager Arsene Wenger.
- PSG come from behind -
========================
They are level atop Group A alongside Paris Saint-Germain, who beat Ludogorets 3-1 in Bulgaria.
Edinson Cavani then grabbed two goals in the second half, either side of a Cosmin Moti penalty miss for the Bulgarian champions, to complete the comeback.
In Madrid, Atletico inflicted Carlo Ancelotti's first defeat as coach of Bayern as Yannick Carrasco's first-half strike separated the sides at the Vicente Calderon in Group D.
The Spaniards eliminated Bayern on away goals in the semi-finals of last season's Champions League and there was to be no revenge for the five-time European champions, who would have lost by a wider margin had Antoine Griezmann not struck the bar with a late penalty.
All the goals came in the first half, with Dmitri Poloz twice having Rostov in front only for Davy Proepper and Luuk de Jong to score for PSV.
The Dutch champions could have won the game but Proepper saw his second-half penalty saved.
In Group B Napoli continued their excellent start to the season by beating Benfica 4-2 in Italy.
Marek Hamsik gave them a first-half lead at the San Paolo before three goals in seven second-half minutes, a Dries Mertens brace coming either side of an Arkadiusz Milik penalty.
Also in Group B, Dynamo Kiev came back to draw 1-1 with Besiktas in Istanbul, substitute Viktor Tsygankov cancelling out Ricardo Quaresma's opener.
You’ve reached your limit of {{free_limit}} free articles this month.
Subscribe now for unlimited access.
Already subscribed? Log in
Subscribe to read the full story →
Smart Quarterly
₹900
3 Months
₹300/Month
Smart Essential
₹2,700
1 Year
₹225/Month
Super Saver
₹3,900
2 Years
₹162/Month
Renews automatically, cancel anytime
Here’s what’s included in our digital subscription plans
Exclusive premium stories online
Over 30 premium stories daily, handpicked by our editors


Complimentary Access to The New York Times
News, Games, Cooking, Audio, Wirecutter & The Athletic
Business Standard Epaper
Digital replica of our daily newspaper — with options to read, save, and share


Curated Newsletters
Insights on markets, finance, politics, tech, and more delivered to your inbox
Market Analysis & Investment Insights
In-depth market analysis & insights with access to The Smart Investor


Archives
Repository of articles and publications dating back to 1997
Ad-free Reading
Uninterrupted reading experience with no advertisements


Seamless Access Across All Devices
Access Business Standard across devices — mobile, tablet, or PC, via web or app
