The visitors converted an 88th minute penalty to snatch all three points from an entertaining encounter, and left Patrick Vieira’s men disappointed after a strong second half display.
Angus Gunn got a hand to Trickett Smith’s spot kick he was unable to prevent cruel defeat.
Attentions had firmly switched to domestic matters after Monday’s narrow loss to Leicester in the International Premier League Cup.
Already assured of a spot in the last 16 of that competition, City knew that a victory against Liverpool could see them rise as high as third in the U21 Premier League, as Vieira’s men seek trophy success at home and abroad.
Mindful of a packed schedule as a result, the boss made six changes from the side that were bitten by the Foxes. Gunn returned between the sticks, while second half sub appearances from Denzeil Boadu and Bersant Celina won the duo starting berths against the Reds.
Regular watchers of the EDS might have been expecting goals in this one – the sides served up seven goals between them in the reverse fixture earlier this term as City ran out 4-3 winners in a thriller on Merseyside.
However, any expected frenetic start failed to materialise this time with both sides spending a cautouis opening ten minutes feeling each other out. Byrne’s well-struck free-kick, which wasn’t far from smacking into the top corner, was the closest either side came in the opening stages.
Once the game did find its spark, the action was end-to-end. Liverpool thought they had the lead after 15 minutes when Dan Lleary headed a free kick in at the far post but the linesman’s flag gave the young blues a welcome reprieve.
However, they weren’t spared for long as the visitors seized their opportunity and Harry Wilson fired the Reds into the lead from close range leaving Gunn with no chance.
It was nearly two just minutes later when Jerome Sinclair had the crossbar twanging, but City heeded the warning and surged forward themselves and Celina was unlucky to see his effort deflected inches wide of the post.
Boadu came agonisingly close to the equaliser after Brandon Barker’s tricky feet had left the Liverpool defence tied in knots, and the forward drew a good reaction save from Reds keeper Lawrence Vigouroux.
Minutes before the break Olivier Ntcham had a chance to send the blues in on a high when the ball came to him right on the edge of the box, but the Frenchman drove his shot into the ground and it bounced up into the grateful gloves of Vigouroux.
City had ended the first half the stronger side, and Vieira’s men soon found their stride again. The keeper was forced to punch away a strong Celina effort at the near post not long after the restart and the young Kosovan played a big role in the eventual equaliser.
A big threat on the right wing, his efforts finally paid off on the 69th minute when he drew off a defender before playing in Byrne, who finished with aplomb.
City hogged possession and territory after that goal, but struggled to break down a well-organised and disciplined Liverpool defence. Byrne smacked a shot against the crossbar while Celina had a good cross cut out but the back line refused to be breached.
Awarded a late penalty after a counter attack, Trickett Smith made no mistake and the visitors were able to see out the game.
Vieira will be hoping his side can translate their second half display into goals when they travel to Norwich in ten days’ time.
