The home side scored four goals within the first 20 minutes to stun Arsene Wenger's side and move to within five points of the league leader in the Premier League title race.
Arsene Wenger's men came into this fixture having not lost a league game at Anfield since March 2007, but were ruthlessly exposed in a scarcely believable opening 20 minutes.
Martin Skrtel was the unlikely scorer of Liverpool's first two goals, the center back twice converting Steven Gerrard set pieces, before Raheem Sterling and Daniel Sturridge found the net with Arsenal in total disarray.
There was no way back for the shell-shocked Gunners and Sterling added his second early in the second half as Liverpool hit five against Arsenal for the first time in 50 years.
A Mikel Arteta penalty reduced Arsenal's arrears with 21 minutes remaining, but provided precious little in the way of consolation.
Brendan Rodgers' men now lie just five points behind the London club, which faces a stiff task to bounce back from a first defeat since it was beaten 6-3 at Manchester City on Dec. 14 in a similarly eventful match.
Skrtel made a crucial clearance at the other end when Simon Mignolet charged from his goal, and then doubled his side's advantage in the 10th minute. After Jon Flanagan had been denied at the near post by Wojciech Szczesny, Skrtel met the resulting corner with a looping header that beat Alex Oxlade-Chamberlain, stationed on the far post.
With Liverpool rampant, Sturridge sent a lobbed finish wide having been played through by Luis Suarez, who subsequently struck the post with a thunderous 25-yarder on the turn before Kolo Toure prodded the rebound wide with an open goal gaping.
Per Mertesacker headed wide from a corner, but Arsenal remained second-best and fell further behind after 16 minutes.
Mesut Ozil was dispossessed by Jordan Henderson and a swift break resulted in Suarez laying on a simple finish for Sterling.
A sublime through ball from Philippe Coutinho provided Sturridge with another one-on-one four minutes later, and this time the England international made no mistake, scoring for the seventh game in succession across all competitions.
Although Arsenal belatedly checked Liverpool's momentum, the home side retained control and pulled further clear seven minutes after the break.
Sterling was given time to cut in from the left and scored at the second attempt after his initial tame strike had been kept out by Szczesny.
Wilshere was booked for a petulant foul on Sterling that summed up Arsenal's frustration before Wenger made a triple change in the 61st minute, introducing Kieran Gibbs, Tomas Rosicky and Lukas Podolski.
Arteta pulled one back from the penalty spot after Gerrard had brought down Oxlade-Chamberlain, and also tested Mignolet with a low free kick, but by then the game was effectively over as a contest.
Sturridge, Gerrard and Suarez were all substituted to sum up Liverpool's dominance, while Sterling spurned a chance to complete his hat trick in the closing stages.