Arsene Wenger’s men enjoyed the best of the first half chances, but failed to open up a stern Cologne defence in the opening period.
The hosts then took a shock lead midway through the second period when Sehrou Guirassy won and calmly converted from the spot, and Arsenal couldn’t find a response handing Cologne a historic win.
Arsenal could have scored in the second minute of the match. Danny Welbeck and Jack Wilshere linked up well in midfield with the latter playing in Ainsley Maitland-Niles, but his effort from a tight angle was pushed away by Timo Horn.
Cologne quickly hit back with a chance of their own when Jhon Cordoba was slipped in behind the Arsenal back line. His cross come shot nearly caught out David Ospina, but he got a fingertip to it on the stretch.
Francis Coquelin fired just wide from range and Wilshere had a tame header easily saved before the Gunners had the best chance of the opening period. Olivier Giroud whipped in a ball from the left that Coquelin took in his stride, his near post effort cannoned off the post.
Welbeck again came close to finding the opener when he cut in from the left and curled an effort just wide of the post, but Cologne held out to ensure the score was level at the break.
Arsenal picked up the tempo following the restart and started to pin back Cologne deep inside their own half, but just as they really started to threaten, the home side took an unexpected lead.
Guirassy went to ground under Debuchy’s challenge in the box and the referee immediately pointed to the spot. The winger dusted himself down and calmly slot down the middle to put his side in front with 30 minutes to play.
Wilshere twice came close to bringing Arsenal level moments later, but he had a fierce low drive pushed away before sending a header over from close range.
Giroud was next to waste a glorious chance to equalise. The French striker evaded Cologne’s offside trap but his poor first touch allowed Timo Horn and Jannes Horn to race in and clear.
As the game entered its dying minutes, substitutes Reiss Nelson and Edward Nketiah both showed their talent but couldn't level for Arsenal. Nelson danced his way through the defence but his toe-poke was pushed away by Horn. Wilshere then drove into the box and squared for Carabao Cup hero Nketiah, but even he couldn’t turn home at the near post.
Cologne weathered Arsenal’s late surge and closed out for all three points to keep their hopes of reaching the next round of the Europa League alive. The Gunners suffered their first loss in the competition, but clinched top spot in Group H regardless after Red Star Belgrade's draw with BATE Borisov.