A nightmare end at Anfield saw the French side sneak a deserved three points in Champions League Group E and left the Reds' European hopes looking almost as bleak as their chances of being crowned Premier League champions.
As if the result was not hard enough to swallow for Rafa Benitez and 40,000 supporters in disbelief, their misery was compounded as captain Steven Gerrard limped out of the match midway through the first half.
Liverpool led until the last quarter, but goals from Maxime Gonalons and in stoppage time from Cesar Delgado in front of the Kop shocked Anfield.
Lyon dictated play for long periods of the first half and should have went a goal up in the tenth minute. The impressive Aly Cissokho played a one-two before looping in a left-footed cross right onto the head of Lisandro Lopez, who could only direct the ball towards Pepe Reina.
Soon after, Gerrard limped down the tunnel and it almost seemed to strike fear into his team-mates as they were left chasing shadows for the next ten minutes.
But a late surge in the first half towards the Kop end saw the Reds go in at the break a goal to the good.
It came when Lucas Leiva surged forward after happily collecting a loose ball in his own half. He unloaded to Fabio Aurelio, Gerrard's replacement, who fired hopefully from range. The ball eventually broke to Yossi Benayoun after Martin Kelly produced an airshot and the Israeli fired into the roof of the Kop end net from six yards.
The home side should have extended their lead soon after as the visitors fell to pieces. Kelly, growing in confidence on his full debut, swung in a brilliant ball right onto the head of Aurelio whose header was brilliantly saved by the palm of Hugo Lloris, an incident that was reminiscent of Lisandro's effort earlier in the half.
A decent 15 minutes in the second period ensued from the hosts, until they allowed their cross-channel opponents to take the upper hand.
With less than 20 minutes to spare, Liverpool's inability to defend set-pieces was once again highlighted as Gonalons produced the winner.
A corner was punched clear by Reina, who then produced a fine double-save from the resulting rebounds. The second block deflected to the substitute defender, who flung himself at the ball to give his side a deserved leveller.
From then on, there only looked like one winner and it came with a touch of brilliance deep into stoppage time.
Cutting Emiliano Insua to shreds down the right wing, a low cross from Sidney Govou evaded Reina and eventually found its way to Delgado, who happily tapped home to virtually seal his side's passage to the knockout stage.