It was Villa's sixth successive win over the Blues in the local derby clashes, but they had to work hard for this win.
They had previously been denied by a superb display from Birmingham's goalkeeper, Joe Hart, who certainly enhanced his prospects of going to South Africa in England's World Cup squad with an outstanding performance.
The win has placed them level on points with fourth placed Tottenham, but they have now played one game more than the London club.
For long spells it appeared as if the game would end goalless until the 82nd minute when Gabby Agbonlahor was brought down by Roger Johnson in the area.
As expected, the early exchanges involved some strong tackling particularly from a City side determined not to find themselves on the end of a heavy defeat like the 5-1 reverse they suffered when the teams last met at Villa Park.
There were no real clear-cut chances from either side in the early stages, although Villa enjoyed most of the attacking play.
Craig Gardner returned to Villa for the first time since his move in January and occupied his favoured midfield attacking role.
Gregory Vignal was a late inclusion for the injured Scott Dann and the Frenchman coped well with the threat of Ashley Young.
But it was goalkeeper Hart who really rose to the occasion and enhanced his growing reputation with two smart saves in quick succession from Stiliyan Petrov and Stewart Downing.
Some slack play between Brad Friedel and Richard Dunne very nearly handed Birmingham a goal on a plate.
Fortunately Friedel recovered to make a good save from Seb Larsson and seconds later he kept out a good effort from Gardner.
Hart, who will not be recalled by Manchester City despite Shay Given's injury, again distinguished himself with a fantastic save to keep out a rasping shot from James Collins.
Battling Birmingham kept at their task and the industrious Barry Ferguson put Jerome Cameron clear only for Friedel to save with his head.
Following the rebound James McFadden's shot was deflected wide and from the corner Downing cleared Liam Ridgewell's header off the line.
Not to be outdone Friedel again came to Villa's rescue to push away a Lee Bowyer effort as Birmingham surprisingly stepped up the pace in the second half.
Villa manager Martin O'Neill sent on Emile Heskey for John Carew in an effort to liven up a goal-shy attack, but he too was thwarted by a save from Hart.
The stalemate was finally broken by Milner's penalty when Hart, watched by England manager, Fabio Capello, and his goalkeeping coach, Ray Clemence, had no chance of saving the shot.