Nathan Redmond's fine solo effort got City off the mark in the 24th minute, with the teenager showing great skill to ghost past the Palace defence before firing home.
Damien Delaney's own goal six minutes later doubled the visitors' advantage, although it looked like a comeback could be on after Palace began the second half impressively.
The hosts, though, soon faded and a Ravel Morrison strike followed by Shane Ferguson's exquisite free-kick saw Palace's 18-match unbeaten league record at Selhurst Park come to a crashing end.
Considering the final score, the match got off to a surprisingly tight start. Palace midfielder Kagisho Dikgacoi crashed over the first opportunity of the match eight minutes in, before Redmond showed flashes of what was to come.
First the right winger's quick feet gave him space to get away a shot on the edge of the box, before Delaney then had to react quickly to deny him.
Redmond was proving a thorn in the Eagles' side and, after Glenn Murray saw a looping header land on the roof, he gave City the lead in some style.
The 19-year-old drifted across the edge of the box and jinked past a number of Palace defenders, before showing excellent poise and balance to slot past Julian Speroni.
Holloway's side looked shell-shocked and Birmingham soon had a second after
Morrison saw a close-range header denied by Speroni, making his 300th Palace appearance, and from the resulting corner Delaney headed into his own goal under pressure from Nikola Zigic.
The goal jolted Palace into life and they looked particularly rejuvenated after Holloway's half-time pep talk.
Highly-rated City goalkeeper Jack Butland had to react well to palm a low strike by substitute Stephen Dobbie, before Paul Robinson was fortunate to see a clearance go wide of his own goal.
However, Palace lacked a cutting edge without the suspended Wilfried Zaha and were soon made to pay as Mitch Hancox, returning from a hamstring injury, played in Morrison and he directed past Speroni in the 64th minute.
The 1,069 travelling fans were celebrating yet again five minutes later as on-loan Newcastle midfielder Ferguson curled home a superb 20-yard free-kick leading to boos from the home faithful at the full-time whistle.