Goals from Chris Martin and Lewis Emanuel saw Mick Harford's basement side men raced into a 2-0 lead in the first half, but a spirited second half fightback ended the Hatters' hopes of finally moving into positive points for the season.
The visitors had started brightly and should have gone ahead in the sixth minute when Ian Henderson's clever backheel played in Tom Cradock, but the loan signing saw his effort beaten away by John Danby.
A quick break in the 11th minute saw Kevin Ellison waste a good opportunity. The winger could have played in team-mate either side him as they outnumbered the sole Luton defender, but Ellison opted to go on alone and shot weakly at keeper Conrad Logan.
Harford's men took the lead on 22 minutes after Kevin Gallen found Martin inside the box, and the striker produced a superb turn to outwit two defenders and send a left-foot finish into the net.
Within five minutes the advantage was doubled as Emanuel hit a stunner of a free-kick from the edge of the box to give Danby no chance.
Chester were given a lifeline when Michael Spillane was adjudged to have brought down Kevin Ellison in the box in the 36th minute. Ryan Lowe made no mistake firing the ball high into the net, sending Logan the wrong way for his 11th league goal of the season.
The comeback was complete for Chester on 51 minutes as Kevin Ellison bundled the ball in from close range, after Kevin Roberts' initial header from a corner had been stopped on the goal-line.
Ellison also wasted a good chance to win the game late on when he raced half the length of the pitch with the ball, only to play a poor pass to the unmarked Lowe and the opportunity was gone.