Horror works best with personal ties firmly in place - in other words, you need to establish ties between player characters and local NPCs.
You have not provided any details as to the nature of the city, so assuming a typical renaissance mix of fantasy cliches:
NPCs to get acquainted with:
- unfriendly but loyal landlady
- traders (food store, magic supplies, art gallery, fresh deliveries)
- clerks
- family of seven, working in a local workshop
- neighborhood brats who idolize heroic characters
- a street corner peddler
- a city crier
- a few familiar beggars
Try to make the ties personal - for example, one of the NPCs listed above prefers talking to a single character, another one tries clumsily to set a date, yet another feels that there is something special about one of the characters and tries to confide about something.
Then, once the players feel at home, start shattering the notion of cozy and friendly local community.
- random acts of irrational violence.
- sudden disappearance of a friendly face with everyone keeping their mouth shut ("They took him in a middle of the night. Don't ask why or you'll disappear, too.")
- people start talking in whispers
- animals begin to behave strangely (a dog biting its owner)
- strange writings (for example, a normal pass may contain several words in unknown language, which, if correctly ordered, may form a part of dangerous invocation)
Once your party begins to feel the ill-boding in the air, escalate stuff beyond possibility of control.
Note: You don't need to turn everyone in a crazed psychopath.
It's sufficient to:
- make it impossible to communicate with afflicted subjects
- direct violence of the afflicted against mundane objects
- have random strangers speak in voices alternatively warning and threatening PCs
Then start taking away all NPCs, in a form of countdown. That way, any agenda you have, should make the PCs try to act on the double.
Regards,
Ruemere