The result at the Madejski Stadium means the Foxes’ hopes of reaching the play-offs may have been dealt a terminal blow.
Two goals in three first-half minutes from Jimmy Kebe and Jobi McAnuff put the Royals in front before Noel Hunt got in on the act and extended the lead.
Andy King pulled a goal back for Leicester late on but it was nothing more than a consolation.
Rampant Reading, who were in the bottom half of the table just a couple of months ago, are now just three points adrift of second-placed Cardiff.
Leicester, meanwhile, are five points shy of the top six with four matches remaining after an untimely run of just two wins in the last 10 games.
Diomansy Kamara, Kyle Naughton and Ayegbeni Yakubu all tried their luck from long range in the opening 15 minutes but failed to worry Reading goalkeeper Alex McCarthy.
The Royals took the lead after 19 minutes. Shane Long held off two challenges before crossing from the left side of the area for Kebe to sweep home from close range.
Kebe turned provider for the second goal two minutes later. The Malian set up McAnuff, who twisted and turned on the edge of the box before beating Leicester keeper Chris Weale with a low shot into the bottom right corner.
City responded well and King forced McCarthy to save with his feet before Yakubu headed over the crossbar just after the half-hour mark.
McCarthy then tipped another header from Sol Bamba round a post following a Richie Wellens corner.
Kebe went close with a couple of efforts from the edge of the box early in the second half before Hunt did extend Reading’s lead in the 67th minute.
Kebe was instrumental again. After breaking from inside his own half, his cross was intercepted but the ball broke to Hunt, who steered his shot past Weale from 12 yards.
Yakubu somehow headed over from six yards out but the big Nigerian was let off the hook shortly afterwards as King rifled home his pass with 11 minutes remaining.
However, Leicester could not grab another to make the closing stages uncomfortable for Reading.