Ali Reghba's second half goal wasn't enough for City to take anything from the Premier League 2 Division 1 clash in Seagrave, despite a spirited second half showing.
Five changes were made to the Foxes team that lost to Everton Under-23s last time out, including the return of defender Mitch Clark following his loan spell at Port Vale.
Callum Wright joined Cheltenham Town earlier on Monday, with goalkeeper Jakub Stolarczyk stepping in as captain.
The Foxes started in a 3-1-4-2 formation, with Reghba and Jake Wakeling lining up as the front two. The visitors, meanwhile, brought the experience of first-team players Bradley Dack, Corry Evans and captain Elliott Bennett for their trip to Leicestershire.
City created the first opportunity, however, when Thanawat Suengchitthawon swung in a deep cross that was met by Callum Hulme at the back post, but he couldn't guide the ball on target.
Rovers also threatened early on when a corner came out to Evans on the volley, with the strike eventually collected by Stolarczyk.
The in-form Wakeling, who had scored twice in as many games going into this fixture, had a half chance, meeting Hulme's in-swinging cross and sending it narrowly over the crossbar.
Reghba then fed Hulme down the right, but after a good first touch, he sliced his effort high and wide of goal. Back at the other end, Bennett's shot from range flashed wide of goal after good work from Connor McBride.
Foxes midfielder Kasey McAteer also went close, taking the ball down and striking a low drive that Jordan Eastham was able to hold on to, before a period of Blackburn pressure followed, which ultimately led to the opening goal.
Dan Pike got to the byline and found Dack in the box but he couldn't find the target on the turn. He then tried chipping Stolarczyk and was again off target.
A superb double save from City's stopper soon after kept out the increasingly involved Dack twice in quick succession. Firstly from a free-kick on the edge of the area and then tipping his follow-up over, before another free-kick from the Rovers playmaker curled wide.
A quick counter attack from the visitors undid City's good work as Wales youngster Jack Vale finished at the near post following one-touch football from McBride and Dack.
After the break some good build-up play from the home side led to the first chance of the second period. Reghba held off Jake Garrett's challenge, turned, and shot straight at Eastham in the Rovers goal.
It would be the Foxes forward who got Leicester back on level terms with a neatly taken first-time finish into the bottom corner after winning the first flick on and then taking Dempsey Arlott-John's pass in his stride.
Reghba looked in the mood for more and almost gave City the lead as his latest shot deflected wide before Arlott-John headed Shane Flynn's corner off target.
The danger was still there at the other end, however, and Luke Brennan was inches away from finding Blackburn's second, hitting the crossbar with a fierce shot from the right.
Blackburn were less fluent in the second period and looked to find a route through to goal from Dack's corner, which was headed into the arms of Stolarczyk by Sam Barnes.
The visitors did go back in front with just over a quarter of an hour to play. McBride got the better of Hulme down the left and after Stolarczyk twice denied Dack, Joe Nolan was there to find the net.
City's Under-23s pushed for a second equaliser and two substitutes combined when Wanya Marcal-Madivadua played in Terell Pennant, who forced a diving save from Eastham. Wakeling then went agonisingly close as he hit the side netting, stretching to reach McAteer's cut back.
That miss would prove costly as Dack curled in the third with four minutes to play, showing his quality once he had picked up the ball inside the Leicester penalty area.
Blackburn's 'keeper Eastham was called into action again in stoppage time to deny Wakeling from a tight angle after good build-up play from Reghba and Pennant, but there was no further way through for the Foxes.
Major moment…
Leicester were well in the contest after equalising and looked set to take at least a point until the visitors pounced and went in front for a second time at a crucial moment in the game, via Joe Nolan's 74th minute strike.
Who impressed?
On commentary for LCFC TV, Gerry Taggart said: "The one player who has really stood out for me this evening is the player who has just come back from his loan spell, Mitchell Clark. Defensively he's been absolutely spot on this evening. He's stopped so many attacks from Blackburn with last-ditch challenges, he's cool on the ball, he wins his headers, covering positionally very good as well."
Where does it leave us?
City's Development Squad remain 11th Premier League 2 Division 1 table with 15 points from 14 games played.
Coming up…
Derby County Under-23s will be the Foxes' next opponents at LCFC Training Ground, facing the Foxes on Monday 8 February (7pm GMT kick-off).
The details…
City: Stolarczyk (c); Godsmark-Ford, Clark, Flynn; Tavares; Hulme (Marcal-Madivadua 76), McAteer, Suengchitthawon (Arlott-John 46), Fitzhugh (T. Pennant 46); Reghba, Wakeling.
Subs not used: Yfeko, Doherty.
Goal: Reghba 50'.