The win lifted Forest to fifth and, despite the defeat, the Foxes remain in second place.
Leicester were undone by poor finishing and sloppy defending and despite dominating the first half they were two goals down by half-time. David Nugent then missed a second-half penalty.
Simon Cox scored the first in the 30th minute after Jamie Paterson's shot was blocked and City failed to clear the rebound.
Jamie Mackie then struck three minutes before half-time, once again punishing City for some poor defending from a corner.
But Leicester had more than enough chances to win the game themselves.
Nugent, who had scored six penalties this season, missed from the spot in the 69th minute and saw goalkeeper Karl Darlow deny him with a brilliant 12th-minute save as well as putting another free header over the bar.
Lloyd Dyer and Jeff Schlupp could also have scored.
Pearson said: "We didn't do well enough in either box is the most succinct way of putting it.
"They didn't create very much but we conceded two goals. We were a bit unfortunate with the first but could have done a bit better with the second.
"And we spurned a number of good chances. So it's unfortunate for us. We have been guilty of not being efficient enough in either box. That is the bottom line.
"To concede the second goal just before half-time is not easy but we have still had plenty of chances throughout the game.
"We have played worse and won this season so I can't sit here and be too miserable about it.
"In the three games we have lost so far we should have got something out of them but there is no point moaning about it.
"I don't like losing local derbies but we have to draw a line under it and move on.
"I don't think we played that badly but it's not quite happened for us. It was a disappointing day for us but we will bounce back."
Opposite number Billy Davies warned that it was too early to get excited about being in the top six as his side enjoyed their first win over Leicester in the last seven meetings between the East Midland rivals.
Davies said: "I enjoyed it because it was a very important three points. But it's only three points, and there is no point at this stage of the season getting too down or too excited if you are in or out of the top six.
"I'm just delighted as a manager to see the players take on board what they worked on last week. We worked very hard on the shape of the team and the tactics and the strength and weaknesses of the opposition.
"Leicester are a very good side and will be there or thereabouts at the end of the season. So I'm just delighted with a very important three points. But it is only three points and I said that to the players.
"What you have to accept in this business is that week in and week out there will be people who will be suicidal if you get beaten or euphoric if you win.
"But it is a case of ticking along and then taking stock in January. Being in the top six does not matter at the moment. "