A hugely entertaining game was littered with talking points, astonishing misses and a sense of injustice for both sides as they felt they were on the receiving end of debatable decisions from referee Michael Oliver.
James Milner put Liverpool ahead against his former club with a penalty six minutes after the break, after Gael Clichy was penalised for a raised boot on Roberto Firmino.
Sergio Aguero scored against Liverpool for the fifth successive Premier League game at Etihad Stadium from Kevin de Bruyne's perfect cross after 69 minutes - before both sides wasted glorious opportunities to secure a vital win in the race for top-four places.
Aguero was particularly culpable, stumbling at the vital moment after his superb approach play had fashioned a clear chance eight yards out. After he fluffed his shot, De Bruyne hit the loose ball against the post.
Adam Lallana produced a candidate for miss of the season when he somehow failed to tap Firmino's pass into an empty net before, in stoppage time, Aguero volleyed over the sort of chance he normally takes with comfort.