City went in front with barely more than a minute on the clock when a Jay Emmanuel-Thomas shot was blocked into the path of Joe Bryan, who cut inside to curl a right-footed shot into the opposite top corner.
But striker Carlton Morris punished poor marking to volley a 55th-minute equaliser from a corner and Hylton coverted a Junior Brown cross with a low finish to give Oxford a deserved success.
The League Two side responded well to their early setback and thought they had levelled after 41 minutes when Brown headed in from a David Hunt cross, but a linesman had his flag up for offside.
City boss Steve Cotterill made eight changes from the side which won at Sheffield United on Saturday and his second-string players did not prove up to the task.
Emmanuel-Thomas shot narrowly wide and Bryan was denied by a goalline clearance from Jake Wright.