It took them out of the bottom three - courtesy also of West Bromwich Albion's defeat at Middlesbrough - and dramatically revived their hopes of survival. What is more they will still be out of the relegation zone tonight if Southampton fail to win at Fratton Park today.
For this privileged position they have principally two men to thank: Andy Johnson, whose 20th goal of the season had them dreaming of victory, and Gabor Kiraly, their goalkeeper, who ensured that it became a reality with a magnificent save from Steven Gerrard with four minutes of normal time remaining.
It looked like an equaliser from the England midfielder when he was teed up on the edge of the box by Fernando Morientes but, although he struck the ball perfectly, the Hungarian threw himself full length to turn it away.
It was a thoroughly deserved victory by Palace against a Liverpool side who revert to their usual indifferent selves whenever there are Premiership points to be earned.
Everton must have been hugely relieved after being held earlier at home to Birmingham. Liverpool just had too big a game coming up to get their heads around this one and now run the risk of being left empty-handed from a season that promised so much.
Rafael Benitez's selection for the Chelsea match may not be any easier. The Liverpool manager will have Xabi Alonso, rested for this one, to welcome back, but must now decide whether to play him in the same midfield as Gerrard, knowing that the two do not harmonise.
Gerrard limped through much of the first half after one of his typically full-blooded challenges rebounded on him and he injured the foot again later on, but seemed to have run it off in the second half. He will not want to miss the Chelsea tie for a variety of reasons.
While the twin concerns of Liverpool - the Champions League semi-final first leg at Stamford Bridge on Wednesday and qualification (ahead of neighbours Everton) for next season's competition - may have led to indecision on their part, Palace's thinking was crystal clear.
Needing nothing short of a win, manager Ian Dowie, went for an uncharacteristically adventurous 4-3-3 line-up. Not that one would have known from much of their first-half performance. Apart from an early header from Tony Popovic that Jerzy Dudek just managed to push over, they never seriously threatened until they scored after 34 minutes.
Palace's no-nonsense Australian defender's more significant contribution was probably the heavy tackle he got in on Milan Baros after just 30 seconds. The Czech Republic striker, whose hat-trick had won Liverpool the reverse fixture, was only able to continue after prolonged treatment.
Another cruncher by the same player on the same player six minutes later earned Popovic a warning. But the damage had been done and Liverpool's leading scorer - with all of nine goals - duly limped off before the half was out.
Benitez had chosen to hold back four for the Champions League tie from his starting line-up - Luis Garcia, who was nursing a slight injury anyway, Alonso, Igor Biscan and John Arne Riise, although the latter came off the bench early in the second half to replace Mauricio Pellegrino.
There was no sign of a goal from either side when Johnson finally settled the proceedings with his first goal from open play since his selection for England.
Danny Granville crossed and the ball was headed out obligingly straight to Wayne Routledge, who volleyed a cross back into the middle where Johnson scored his 20th goal of the season with a fine glancing header.
The delight of Palace's supporters' was accentuated by the news from the Riverside stadium that rivals Albion had gone two goals down.
Palace themselves might have been two goals ahead within seconds of the restart in the second half. Again Johnson was involved, putting in a cross which Jamie Carragher completed missed. Tom Soares should have buried it but instead allowed Pellegrino to hack it clear. The goal had given Palace renewed self-belief after their midweek reverse at Blackburn and Michael Hughes shot narrowly wide.
However, they were unable to build upon their slender advantage and in the last 15 minutes, during which Palace are usually at their most vulnerable, they managed to survive without too many scares other than that one from Gerrard. They were that much in control.