Newry skipper Richard Clarke grabbed an 88th-minute winner to give the Premiership side a 3-2 lead going into the second leg at Lakeview Park.
Mattie Burrows gave Loughgall the lead in the third minute of the Co-Operative Cup quarter-final with a half-volley.
Newry defender Cullen Feeney rose to head in a 19th-minute equaliser from a Steven Ferguson corner.
Ross Black's first goal for City in the 32nd minute put Newry into the lead before Neil Alderdice levelled.
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