The sides couldn’t be separated after 120 minutes of drama ended all square at 1-1.
Nabil Touaizi had given City a 45th minute lead only for Liverpool to dramatically draw level four minutes from time through former Blue Bobby Duncan.
With extra time producing no further goals, the game went to a penalty shoot-out.
And it ended in heartbreak for Gareth Taylor’s side with Cole Palmer’s effort which hit the bar, ultimately proving the difference as Liverpool converted all five of their spot-kicks to claim the Youth Cup.
At a chilly but sunny Academy Stadium and with a bumper crowd of almost 4,000, including Pep Guardiola looking on, Gareth Taylor’s young side made a fine start, taking the game to Liverpool from the off.
Indeed, City almost took a second minute lead as a stunning 40m crossfield pass by Tommy Doyle found left winger Adrian Bernabe who whipped in a wicked cross that found Nabil Touaizi.
However, the Spanish striker’s low shot was smothered by Liverpool keeper Vitezslav Jaros.
Liverpool though slowly gained a foothold and started looking dangerous on the break.
And City keeper Louie Moulden needed to be at his nimble best to arc back and tip over an 11th minute deflected shot from Duncan that was goal-bound.
A minute later the hugely impressive Taylor Harwood-Bellis came to City’s rescue, the central defender producing a stunning goal-line clearance from Jake Cain’s shot after the ball had ricocheted around the box.
City though dominated possession and territory with Ben Knight firing wide before a brilliant move between Doyle and Felix Nmecha ended with Doyle beating the Liverpool keeper but just missing the target.
However, in first-half injury time, City’s persistence was finally rewarded as we broke the deadlock.
A slick pass by Benarbe put Jeremie Frimpong free on the left flank and his low cross was met by Touaizi who evaded his marker and steered the ball home inside the post to send City in at the break with a precious lead.
Buoyed by the goal, City made fine start to the second with Doyle’s shot testing Jaros’s reflexes.
And after a 50th minute City interception, Doyle swept upfield and fed Touaizi but his shot didn’t have enough zip.
Liverpool launched an immediate counter-raid with Moulden needing to be alert to grasp Abdi Sharif’s stinging drive.
That heralded the Merseysiders’ best spell of the final with City pegged suddenly back in their own half and with skipper Eric Garcia forced off through injury.
Moulden was called into action again on the hour to palm out Leighton Clarkson’s 20-yard effort with City needing to be constantly on their guard.
However, City almost sealed the deal on 75 minutes when a rapid break out of defence from Touaizi ended with Jaros tipping Knight’s dipping shot round the post.
There was another huge scare for City on 80 minutes when Liverpool full-back Yasser Larouci’s curling shot was a whisker wide.
City roared back and Knight saw a spinning effort from Bernabe’s switch-pass cleared off the line by Boyes before another attacking thrust by the winger saw a goal-bound shot deflected over.
But with less than five minutes left Liverpool’s pressure finally told. City lost possession in midfield and Duncan’s 25-yard shot evaded Moulden’s grasp to make it level pegging.
City looked to regroup and in added time Harwood Bellis powered a header narrowly wide as the game was then taken into extra time.
Though fatigue was now a factor for both teams, chances were at a premium before City sub’s Nathanael Ogbeta’s 100th minute shot caused panic in the Liverpool ranks before Bernabe failed to find proper purchase on a close-range effort.
Into the second period of extra time Frimpong’s radar let him down as he ran at the Liverpool defence and then Duncan’s trickery on the edge of the City box ended with his shot cannoning wide.
The hosts appealed for a penalty after the ball appeared to strike the hand of Williams in the Liverpool box but referee Darren England was unmoved and the pressure continued with Harwood-Bellis heading just wide from a Doyle corner.
And with that the final went to drama of a penalty shoot-out.
The first three spot-kicks from Liverpool’s Williams and Dixon-Bonner and City’s Nmecha were all successfully converted before City’s Cole Palmer saw his effort hit the bar.
That proved the decisive moment in the shoot-out with every other kick on target from both sides before Liverpool skipper Paul Glatzel successfully converted the visitors' fifth penalty to end the night in agony for the hosts and triumph for the Anfield side.
How we lined up
Rowan McDonald was the midfield anchor with Tommy Doyle and Felix Nmecha in central midfield while Ben Knight and Adrian Bernabe provided width ion either flank. Nabil Touaizi was deployed as the focal point in attack.
Gareth Taylor’s young charges are back in action on Saturday when we return to Premier League Under-18 action away at West Bromwich Albion, kick-off 12 noon.