Unai Emery's men missed out on the opportunity to move up to third position as they lost 1-0 to Sheffield United on Monday.
A first-half strike by striker Lys Mousset was enough to seal victory for the Blades as they ended Arsenal's eight-match unbeaten run, which included five in Premier League.
Arsenal had hoped for a win that could have seen them above both Chelsea and Leicester City but were punished in the cruellest of ways for failing to take their chances.
Nicolas Pepe was once again a guilty party as he missed a begging chance from close-range moments before his side conceded at the other end.
The Ivorian had started a quick counter-attack in the 21st minute after Bernd Leno had punched Norwood's corner towards him. Pepe beat his marker before playing a pass to Xhaka who found the overlapping Kolasinac.
The Bosnian's well-weighted cross found an onrushing Pepe who got very little contact with the ball from close range to scoff wide.
Nine minutes later, the Gunners were made to pay for that miss. Mousset tapped into an empty net for his second Premier League goal this season following O’Connell’s knockdown from another Norwood corner.
From that moment onward, Sheffield United sat back and allowed an uninspiring Arsenal team to have the majority of the ball possession while causing a few scares on the break.
Arsenal, however, did have a strong shot but instead Bukayo Saka was made for simulation by centre referee, Mike Dean.
Granit Xhaka had a long-range shot parried by Manchester United loanee, Dean Henderson, before making another smart stop Pepe from a free-kick.
Dani Ceballos, Alexander Lacazette, and Martinelli were brought in during the second half, but they couldn't stop the Londoners from losing at the ground they had failed to win in three previous visits.
Unai Emery and his men will now switch their attention to Thursday's Europa League game against Vitoria Guimaraes before returning to league action with a home match against Crystal Palace on Sunday while Sheffield United will hope for a similar result against West Ham on Saturday.