Forfar missed the chance to join Morton at the top of League One despite taking an early lead at Balmoor.
Poor defending and a red card for defender Stuart Malcolm allowed Peterhead back into the game and Gary McDonald scrambled in a late winner for the hosts.
Forfar manager Dick Campbell said: “We were all over them in the first 20 minutes but I can’t believe the goals we lost. Losing Stuart Malcolm when he was sent off.
finished the game for us but we defended poorly.”
Forfar went ahead on two minutes when Iain Campbell’s free-kick picked out Gavin Swankie, who turned and fired a shot high into the net from 14 yards.
Peterhead eventually posed a threat 10 minutes before half-time but Andy Rodgers shot high and wide.
The game was turned on its head in a dramatic two-minute spell. On 39 minutes Jamie Redman latched on to a loose ball at the corner of the six-yard box to lash a shot past Rab Douglas and moments later Rodgers glanced home a Jamie Stevenson cross.
The Loons were reduced to 10 men after 69 minutes with Stuart Malcolm shown a straight red for pushing over Rodgers but they were level after 82 minutes,
Danny Denholm heading in a Campbell free-kick.
However, McDonald scrambled in Peterhead’s winner in the 87th minute.