Around 2,000 home fans were at Easter Road to witness Gunners goalkeeper Arthur Okonkwo mark his promotion to the first-team squad with a dreadful error which gifted Martin Boyle a tap-in after 21 minutes.
Daniel Mackay doubled Hibernian’s advantage 21 minutes from time before substitute Emile Smith Rowe scored a late consolation for the visitors.
Manager Mikel Arteta is aiming to revive Arsenal’s fortunes this season after missing out on qualifying for Europe for the first time in 25 years and he named a starting line-up including club captain Pierre-Emerick Aubameyang and Willian.
Eddie Nketiah missed a glorious chance to put them ahead inside the opening ten minutes. Centre-back Paul Hanlon dallied in possession and Nketiah snatched the ball away for a clear run on goal, but the 22-year-old could only sidefoot wide when confronted by former Arsenal goalkeeper Matt Macey.
Arsenal were then made to pay when Cedric Soares lifted a looping back-pass to Okonkwo that the 19-year-old Nigerian keeper missed on his attempted clearance, allowing Boyle a tap-in.
Arsenal had chances to equalise but could have fallen further behind when Steven Bradley hit Okonkwo’s left-hand post with a low drive five minutes before the break.
Arteta made seven changes at the interval with Thomas Partey, Alexandre Lacazette, Pepe and Smith Rowe among those introduced, contributing to an improved display. Pepe went close with a curling effort before Partey struck the woodwork with a 30-yard free-kick.
But Arsenal wasted several promising openings as Hibernian struck after 68 minutes as Hanlon headed a corner back to the far post where Mackay was on hand to nod in from close range.
Pepe had the chance to bring Arsenal back into the game after winning a spot-kick following a challenge by Paul McGinn but Macey dived to his left to turn the Ivory Coast winger’s penalty away.
They did eventually score with eight minutes left as the lively Lacazette slipped a pass through for another substitute, Hector Bellerin, to cross to the far post where Smith Rowe was on hand to volley home but Arsenal were unable to avoid defeat.
The Gunners’ next fixture sees them take on Rangers at Ibrox on Saturday.