Diaz's goal came after a poor pass from Ederson led to Madrid's attack, while he was lobbed by Vinicius Jr after rushing out to meet him which allowed Bellingham to poke home the winning goal.
Speaking in his post-match press conference, Ancelotti said: "We looked to press high when Ederson had the ball, and to drop to a mid-block when he didn't, with the forwards coming inside and our midfielders not looking to push.
However, things fell apart at the death as late goals from Brahim Diaz and Jude Bellingham mean Madrid will take a one-goal advantage into the second leg.
The second leg will take place at the Bernabeu next Wednesday, with City needing to overturn the one-goal deficit in order to keep their hopes of winning the Champions League alive.
Carlo Ancelotti has revealed Real Madrid looked to target Ederson during their 3-2 win over Manchester City on Wednesday.
