Two pieces of classic predatory finishing by Chris Sutton put a smile on Kenny Dalglish's face as the Blackburn boss celebrated his third successive win over his former side.
Sutton's double-strike, taking his total to 12 since Dalglish splashed out a British record 5 million pounds for his services, enabled the Ewood Park side to keep up the pressure on Newcastle in the battle for the Premiership.
But they were pressed all the way by Roy Evans' exciting Anfield side, who took the lead against the run of play through Robbie Fowler but then matched Rovers chance for chance in a thrilling encounter.
It needed a virtuoso display of unselfish attacking by Sutton's strike partner Alan Shearer to haul Blackburn back into the match as he set up goals for Mark Atkins and then Sutton.
But John Barnes then unleashed a truly awesome strike to pull the Reds back on terms, only for Sutton to take advantage of a slack moment at the back to claim all three points and extend Blackburn's 100% home Premiership record.
Shearer and Sutton started off in the mood to show exactly why they had cost Kenny Dalglish 8.3 million pounds and to cast doubt upon the 9.1 million pounds spent on the Liverpool defensive trio of Neil Ruddock, John Scales and Phil Babb.
A fierce cross-shot from Shearer whistled across the face of goal and Sutton nearly capitalised on great work from his partner only to lose control.
An inventive free-kick saw Ian Rush move onto Ruddock's pass to bring the best out of Tim Flowers but that was a rare excursion forward for the visitors.
Jason Wilcox wasted a superb opening after being found by Sutton's crafted pass, Shearer was denied by the legs of James and then a Tony Gale header was cleared off the line by Rob Jones, before Liverpool went in front in the 30th minute.
Jan Molby took a short free-kick to Steve McManaman, the winger found Robbie Fowler in space and when the teenager's shot deflected off Gale, Flowers could only help the ball on its way.
McManaman nearly grabbed a second with a fine run and shot and Blackburn - and Shearer in particular - were growing increasingly unhappy at the officials' decisions.
But that mood disappeared with two goals in five minutes at the start of the second period.
The first came in the 52nd minute, when Liverpool failed to deal with Wilcox's deep cross. Stuart Ripley's shot was blocked, but Shearer reacted quickly and pulled the ball back for Mark Atkins to crash home from close range.
And then Rovers went in front. Ripley's throw found Shearer on the right and he again got to the deadball line before pulling back. Sutton, sliding in ahead of Babb, poked towards goal, James half-blocked, but, as the ball tricked towards the line, Sutton made sure.
Yet Liverpool, incredibly, were on terms almost instantly, courtesy of a piece of sheer brilliance by John Barnes. Stig Bjornebye got free on the left, flighted over the perfect cross and Barnes, 12 yards out, took off to thunder a spectacular overhead kick into the bottom corner.
Fowler, fed by Jones, then missed a great chance to put Liverpool ahead again and they were made to pay by Sutton, bulldozing his way through Ruddock's challenge before drilling home as James came off his line.
Shearer and then Fowler were denied by the respective keepers as the excitement continued to the last minute but Blackburn held on, the roar which greeted the final whistle showing the importance of the encounter.
Kenny Dalglish was in a buoyant mood: "Both sets of players and fans made it a game to remember," said Dalglish. "And the good thing is that we got the three points. Chris did very well indeed. His work and his general overall performance was superb and I suppose the goals made it even better."
The Blackburn manager admitted his side had been pressed all the way by the visitors. "They played very well in the first half but then it was good to see Mark Atkins score the first equaliser for us. We haven't got too many from midfield even though the front two have got a few so that was a good boost for us."
Liverpool manager Roy Evans seemed not to know whether to laugh or cry: "It's a mixture of frustration and disappointment," said Evans. "After we went ahead the game was there for us to take it but we didn't do what we should have done. We should have pressed forward and tried to take advantage of the situation. Not doing that has cost us the game."
Evans added: "We really didn't push ourselves forward enough to capitalise and because of that they got the equaliser. I can't complain about the performance or the effort because everybody worked really hard and in fact the effort was brilliant. But I was just disappointed at one or two things that we did wrong and the goals we conceded as a result."
One moment which will live long in the memory of all who were at Ewood was the stunning overhead goal from John Barnes.
Evans said: "It's just a shame that a goal as good as that was scored by somebody who ends up on the losing side. It's the sort of goal that as soon as it went in you thought it could win goal of the season. I am sure that people will be talking about it after they watch it on the TV."
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