Television cameras apparently caught a Chelsea fan aiming racist abuse at England winger Sterling during the Blues' 2-0 win over City at Stamford Bridge.
Chelsea and the British police are investigating the incident, which has provoked widespread condemnation amid fears football is returning to the dark ages of racism that blighted the sport in the 1970s and 1980s.
Chelsea have taken swift action to temporarily suspend four fans until they have concluded their probe, with the threat of permanent bans if they find evidence of racist behaviour.
"Chelsea Football Club has suspended four people from attending Chelsea matches pending further investigations into allegations regarding the behaviour of supporters towards Raheem Sterling during our match against Manchester City on Saturday," a Chelsea statement read.
"Our investigations into this matter are ongoing. We are fully supporting the police investigation and any information we gather will be passed on to them.
"Chelsea Football Club finds all forms of discriminatory behaviour abhorrent and, if there is evidence of ticket holders taking part in any racist behaviour, the club will issue severe sanctions, including bans.
"We will also fully support any criminal prosecutions."
City responded to the suspensions by praising Chelsea's decision to take action, with the Premier League champions also confirming they are helping with police over the incident.
"Manchester City FC welcomes Chelsea FC's decision to issue suspensions to the individuals who verbally abused Raheem Sterling during the match at Stamford Bridge on Saturday," a statement said.
"The club and Raheem are fully engaged with Chelsea FC and the investigating authorities as they continue to examine the events in question.
"Manchester City and Raheem are committed to working with all relevant parties and organisations to support the objective of eradicating racism from the game."
In an Instagram post on Sunday, Sterling said he "had to laugh" when he heard the remarks because he expects "no better".
The 24-year-old accused British newspapers of helping to "fuel racism" with the way they portray young black footballers.
Former Liverpool star Sterling referred to a story from January about City team-mate Tosin Adarabioyo reportedly buying an expensive house despite never having started a Premier League match.
"The young black kid is looked at in a bad light. Which helps fuel racism an(d) aggressive behaviour," Sterling wrote.
"So for all the newspapers that don't understand why people are racist in this day and age all I have to say is have a second thought about fair publicity and give all players an equal chance."
The Professional Footballers' Association said it stands "shoulder to shoulder" with Sterling and believes he is singled out for negative media coverage.
The PFA has been in contact with the England international to offer support and praised the restraint he showed at Stamford Bridge.