Robin van Persie's stoppage-time winner gave Arsenal a dramatic victory to leave Liverpool 10 points adrift of the Premier League's top four.
The Reds dominated early on but Dirk Kuyt had a penalty saved and both he and Luis Suarez fired against the post.
Liverpool finally took the lead when Laurent Koscielny sliced Jordan Henderson's cross into his own net.
But Arsenal quickly levelled through Van Persie's header and won it late on when he volleyed home Alex Song's pass.
DALGLISH'S 450th GAME
- This was Kenny Dalglish's 450th game as a top-flight manager with Liverpool, and Blackburn and Newcastle, and his 88th defeat. His full record stands at W247, D115, L88
The Dutchman's lethal finishing was the difference between the teams and, as well as inflicting a first home defeat of the season on Liverpool, underlined just how costly the Reds' poor form in front of goal has been to their campaign.
Kenny Dalglish's side, fresh from their Carling Cup final victory, paraded that trophy before kick-off but their hopes of using it as a foundation for a push towards the Champions League places were to be frustrated.
In fact, the first half will have made familiar viewing for fans of both sides, with Arsenal often caught wide open at the back but Liverpool unable to make the most of the series of chances they created.
Stewart Downing wasted the Reds' best early opening, scuffing his shot completely from 30 yards after Wojciech Szczesny dashed out of his area to deny Suarez, only to head straight at the England winger with his goal unguarded.
Arsenal's porous defence appeared unable to cope with Suarez's guile in front of goal, and the Uruguayan was at the heart of the move that produced Liverpool's penalty after 19 minutes, exchanging passes with Kuyt before going to ground under a challenge from Szczesny.
Kuyt was given responsibility from the spot but could not beat the Polish keeper, who sprang to his right to keep out the penalty - the sixth Liverpool have missed this season - and recovered to push away Kuyt's follow-up too.
Liverpool did not have to wait much longer to take the lead, but it was perhaps telling that they needed Arsenal's help to find the net, Koscielny making a complete hash of his attempt to clear Henderson's cross.
Dalglish's men should have been further ahead within moments of the restart, when another neat build-up ended with Szczesny saving Henderson's low shot and Suarez firing the rebound against the post.
Liverpool could have been out of sight, but instead Arsenal were quickly level when Bacary Sagna sent over a peach of a cross for Van Persie to escape Jamie Carragher and head home at the near post.
The setback did not stop the home side coming forward and they were denied by the woodwork on a second occasion before the break - and the 21st time in total this season - when Kuyt met Charlie Adam's cross with a flicked finish that came back off the post.
A lengthy delay at the start of the second half - when Mikel Arteta suffered concussion and a jaw injury in an off-the-ball collision with Henderson - seemed to bring a halt to the Reds' momentum however.
Arsenal began creating more openings, with home keeper Pepe Reina reacting brilliantly to keep out a Theo Walcott snapshot that took a deflection off Martin Skrtel on its way through to goal.
But Liverpool still looked the most likely to win it, Martin Kelly wasting a glorious chance when he miscued at the far post from a delicious Kuyt cross.
So it was a big surprise when, at the start of nine minutes of stoppage time caused by Arteta's injury, Van Persie latched on to Song's lofted through ball and smashed home a first-time shot at Reina's near post.
That took Van Persie's tally to 30 goals for the season, including 25 in the league, and gave the Gunners' own hopes of finishing fourth a huge boost.
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