Real’s first defeat in the league since October saw them fall to second place on 53 points after 25 games, while Levante climbed up to 10th.
A superb strike from Jose Luis Morales condemned Real Madrid to a 1-0 defeat away to Levante on Saturday which saw them unseated at the top of the La Liga standings by Barcelona.
Real's problems deepened with a suspected ankle injury to Eden Hazard, who limped off the pitch four days before their Champions League showdown with Manchester City and a week before their showdown with Barca in the 'Clasico'.
Morales won the game with an unstoppable strike in the 79th minute, flummoxing Madrid goalkeeper Thibaut Courtois by blasting a first-time shot inside the near post from a tight angle.
Real's first defeat in the league since October saw them fall to second place on 53 points after 25 games, while Levante climbed up to 10th.
Champions Barcelona replaced Zinedine Zidane's side at the top of the table on 55 after hammering Eibar 5-0 earlier on, gaining five points on their arch-rivals in the space of seven days, ahead of next Sunday's 'Clasico' at the Santiago Bernabeu.
"A week ago we were three points clear and now we're two points behind, that shows you cannot afford to switch off," said Real defender Dani Carvajal.
"We wasted a lot of chances, we began well but got worse as the game went on and we have lost three points."
Real were looking to respond after last week's surprise 2-2 draw at home to struggling Celta Vigo but struggled to cope with a Levante side who seem to relish playing the biggest sides at home and beat Barca 3-1 earlier this season at the Ciutat de Valencia stadium.
Zidane not worried
Zidane did not hide his frustration at losing the game but said he was not worried about the ramifications of the last two results.
"I'm not worried at all, this is football and things like this can happen. We have had good some very good moments this season and I'm not going to give up after two bad results," the Frenchman told reporters.
"We believe we can move on from this with strength, belief and energy. This is a bad run, but we have to focus on next week.
"Right now we are very frustrated because this is a defeat which hurts us a lot but football always gives you another match to redeem yourself."
The visitors' best chance fell to Hazard, who scuffed the ball when he had a clear sight of goal early in the second half.
A few minutes later he left the pitch looking in pain, in only his second game back from an ankle injury that ruled out him of action for almost three months.
"I think it's a knock to the same area where he suffered his last injury and it does not look good," Zidane added.
The only goal of the match arrived when it was least expected when the ball bounced into the path of Morales, who is nicknamed 'El Comandante' and is something of a cult hero at the Valencia club.
He had not scored in the league since August but struck the ball perfectly, leaving a dumbstruck Courtois with no chance.
"I struck the ball with all my soul," said Morales.
"I knew that I was running out of gas but I struck it really well. The ball gathered pace and I'm so happy for the goal and what it means, which is three points."