The loss is a huge blow to their slim hopes of a successful title defence, as the Reds are now ten points behind Manchester City, who have a game in hand; Pep Guardiola's men, meanwhile, won their 14th game in all competitions.
The game was pretty even till Liverpool gave away a penalty. However, Manchester City failed to capitalise, and the half ended goalless.
The visitors opened the scoring when a save from goalkeeper Alisson was not cleared in the danger area. Liverpool soon got their equaliser off a Mohamed Salah penalty.
However, Manchester City pounced on two mistakes from the Liverpool goalkeeper, before adding another to condemn the champions to their third league reverse on the trot at home.
On that note, let us have a look at the player ratings of both teams.
Liverpool Player Ratings:
Alisson - 4/10
However, it was a horror show from Alisson then on, as he needlessly gave away two goals with questionable clearances.
Trent Alexander-Arnold - 6/10
Trent Alexander-Arnold made his mark for Liverpool at both ends in the first half, winning balls at the back before driving forward and putting in useful crosses.
However, he struggled to contain the ever-mobile Manchester City attack in the second half when the visitors drove forward in numbers.
Fabinho - 5/10
Fabinho cheaply gave away a penalty in the first half, but Ilkay Gundogan missed from the spot.
In an abysmal performance from the Liverpool midfielder, Fabinho was booked in the second half after bringing down Phil Foden.
Jordan Henderson - 5/10
The Liverpool captain struggled in the second half, as the Manchester City attackers seemed to target him. Jordan Henderson was unable to cope with Foden's unrelenting movement and was often caught out of position on several occasions.
Andrew Robertson - 5/10
Andrew Robertson was the least involved in Liverpool's famed wing-backs; he only put in hopeful balls into the box for most of the first 45 minutes.
The intended target for both of Allison's horrid clearances, Robertson was situated too high up the pitch. It might have been a tactical instruction, but it cost his side, nonetheless.
Thiago Alcantara - 6/10
The ex-Bayern Munich midfield maestro kept possession in his usual comfortable manner and often looked to play line-breaking passes. However, Thiago Alcantara was removed just after the hour mark when the scores were still level.
Georginio Wijnaldum - 5.5/10
Georginio Wijnaldum was the most mobile of the Liverpool midfield trio in the first half. He drove forward with the ball with purpose, and Manchester City's midfield struggled to deal with him.
However, off the ball, he was not imposing for Liverpool, as Wijnaldum completed no tackle or interception all game.
Curtis Jones - 5.5/10
The 20-year-old was the most defensively alert player in the Liverpool midfield. Curtis Jones made a team-high four interceptions before he was replaced by James Milner in the 65th minute.
Mohammed Salah - 6/10
Mohamed Salah scored Liverpool's only goal of the game off a penalty which he won himself. Otherwise, he was kept in check by Manchester City, who gave him no space to exploit. Salah only had one shot besides his penalty kick all game.
Sadio Mane - 5/10
The performance of Liverpool's number 10 against Manchester City was a far cry from his last appearance against Tottenham Hotspur last month.
Sadio Mane was unafraid to run at Manchester City's defence, but there was no way through the resolute visiting defenders.
Roberto Firmino - 5/10
Roberto Firmino's struggles in front of goal continued against Manchester City. The Brazilian has scored just once in his last nine league games. He did show sparks of brilliance in the first half with some silky touches and deft passes, though.
However, Firmino soon faded as the game wore on and could only muster one shot all game for Liverpool.
Ratings of Liverpool Substitutes
Xherdan Shaqiri - 5/10
Brought on to create or maybe even get the winning goal for his side, Xherdan Shaqiri failed to threaten Manchester City's defence.
The Liverpool forward did well to keep possession whenever he got the ball, but had no noteworthy impact in the final third.
James Milner - 4.5/10
James Milner failed to lift a depleted Liverpool defence after coming on. He struggled to deal with the pace of the game in general, as his side conceded three goals against City during Milner's 22 minutes on the pitch.
Konstantinos Tsimikas - 4/10
Konstantinos Tsimikas came on late but had no impact on the game.