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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.
Liverpool, fresh from their Carling Cup final win at Wembley on Sunday, 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 was seemingly unable to cope with Suarez's guile in front of goal, and the Uruguayan was at the heart of the move that led to Liverpool's penalty after 19 minutes, when he exchanged passes with Kuyt before going to ground under challenge from Wojciech Szczesny.
Kuyt was given responsibility from the spot but could not beat the Polish keeper, who sprang to his right to keep out his penalty - the sixth Liverpool have missed this season - and recovered to push away Kuyt's follow-up too.
Although Liverpool did not have to wait much longer to take the lead, it was perhaps inevitable that they needed Arsenal's help to find the net, with Koscielny making a complete hash of his attempt to clear Henderson's cross.
Kenny 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.
That setback did not stop the home side coming forward and they were denied by the woodwork for a second time before the break when Kuyt met Charlie Adam's cross with a flicked finish which came back off the post.
The Reds' momentum was hit by a lengthy delay at the start of the second half when Mikel Arteta suffered concussion and a jaw injury after an off-the-ball collision with Henderson.
Arsenal began creating more openings, with Reds keeper Pepe Reina reacting brilliantly to keep out Theo Walcott's snapshot that took a deflection off Martin Skrtel on its way through to goal.
But Liverpool still looked the most likely to win it, with Martin Kelly wasting a glorious chance when he miscued at the far post from a delicious Kuyt cross.
So it was big surprise when, at the start of nine minutes of stoppage time because of Arteta's injury, Van Persie latched on to Song's lofted through ball and smashed home a first-time shot.
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