A Dean Saunders goal 11 minutes from time capped below-par Liverpool's recovery after they trailed at half-time to lowly Sheffield United.
Liverpool had enough chances to have won with comfort but were repeatedly frustrated by the brilliance of goalkeeper Simon Tracey.
There seemed little danger to Liverpool as Glyn Hodges drove in a low cross from the left after 32 minutes.
But Jan Molby was at full stretch as he tried to intercept and succeeded only in pushing the ball through for Brian Deane to score with ease from 10 yards.
Liverpool equalised after 52 minutes when Steve McManaman, an interval substitute for Mike Marsh, cut into the box past two defenders and though his cross eluded Saunders, Ray Houghton raced in to turn the ball home at the far post.
Houghton looked certain to score his second in the 64th minute, powering a shot from a Saunders cross back towards the far corner only to be denied by a superb save by Tracey. But the keeper, who foiled Saunders three times in the first half, had no chance when Michael Thomas' shot rebounded off a ruck of players for Saunders to drive in the winner off a post.
Disappointed Sheffield United goalkeeper Simon Tracey spoke about the point that got away.
The 24-year-old keeper produced a series of fine saves. "It is disappointing to lose after leading 1-0 and we should have at least got a point out of the game," said Tracey. "We put in a lot of hard work in the first half but in the end it was all for nothing."
But he claimed Saunders mis-hit the winning goal. "If he had hit it straight on I might have got to it but he mis-hit it and it was typical of our luck that it went in off the post."
Liverpool boss Graeme Souness said: "We gave them a goal start but we had opportunities to make life easier for ourselves."
Souness revealed that Scottish international Steve Nicol had signed a new three-year contract. He said: "I've played with him and managed him and he's a wonderful player for any team. He's got so much talent."
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