The match ended 1-1 after extra time and when Fernandinho missed the first penalty of the shoot-out, it looked bleak for the Blues.
But Caballero was the hero, saving Liverpool’s second, third and fourth spot-kick as City triumphed 3-1 in the shoot-out.
Those who remember the last penalty shoot-out at Wembley for the Blues was back in 1999 when City also won 3-1 on penalties – that day Nicky Weaver was the hero, but today was Caballero’s moment in the sunshine.
Manuel Pellegrini made just one change from the side that beat Dynamo Kyiv in midweek with, as expected, Joe Hart.
Only five of the starting line-up remained from the 4-1 thrashing the Blues suffered to Liverpool last November with the Blues looking to erase the memory of that damaging defeat at the hands of Jürgen Klopp’s side.
With Wembley awash with sky blue at one end and red the other, the game kicked off to a cacophony of noise from both sets of fans.
The early exchanges were understandably tentative with little of note in the first 20 minutes, but City came within a whisker of opening the scoring with 23 played
...Liverpool v City...
David Silva collected the ball on the halfway line before playing a precision pass to Sergio Aguero who had Lucas Leiva and Mamadou Sakho in close proximity.
Kun shimmied past Lucas and Sakho stumbled as he went past him across the penalty area giving him a clear sight of goal but his low shot was palmed onto the foot of the post by Simon Mignolet.
As the half wore on, so City started to look the better team with Silva, Yaya Toure and Raheem Sterling all causing problems for the Merseysiders.
Liverpool lost Sakho, presumably with concussion, just before the half-hour mark having earlier suffered a nasty clash of heads with team-mate Emre Can and his replacement Kolo Toure received a warm welcome from the City end.
With Vincent Kompany looking imperious in defence, Yaya Toure sharp and inventive in the middle, the Blues looked the more likely to break the deadlock having comfortably kept Liverpool’s attack at bay and Caballero had very little to do in the opening 45.
Within four minutes of the re-start, however, City were ahead.
Silva played a lofted ball to Aguero who held up play on the edge of the box, waiting for the overlapping run of Fernandinho who took the ball on before slipping an angled low shot through Mignolet who will feel he should have done better.
It was the spark the game needed and Liverpool came close to levelling within six minutes as well-worked move ended with James Milner slicing wide from the edge of the six-yard box.
As the game ebbed and flowed, it was then City’s turn to miss a good chance – golden, in fact – as Yaya Toure burst forward, played in Silva whose low cross was fired wide by Sterling with the goal at his mercy.
Then City had a strong shout for a penalty as Alberto Moreno left a trailing leg as Aguero went past him in the box but referee Michael Oliver was having none of it – TV replays proved he was wrong – a big call at a vital stage of the game.
With ten minutes remaining, Aguero won possession on the right before crossing to Sterling who again went close – but the second goal wouldn’t come.
City had defended superbly all afternoon, but with just six minutes to go, Liverpool finally broke through as the ball found its way to Daniel Sturridge whose low cross found Lallana and when the England midfielder’s shot struck the post, Phillippe Coutinho - who loves scoring against the Blues - swept home the rebound.
It was harsh on City, but it was the price of one too many missed chances to put the game to bed at the other end
...Liverpool v City...
The Blues almost grabbed a dramatic late winner as the excellent Yaya Toure saw his header scrambled off the line before being desperately hacked clear – it was the last real chance of normal time.
Pablo Zabaleta and Jesus Navas replaced Fernando and Bacary Sagna as play resumed but there would be only one real chance in the opening period of extra time as Aguero burst through only to see his shot parried by Mignolet before being cleared as it rolled towards goal.
Caballero made a superb reflex save from Divock Origi after the re-start of the second half of extra time as Liverpool began to dominate in the latter stages, though City were still dangerous on the break with Aguero coming close to turning a poor headed back pass in.
The Blues ended strongly and neither side could find a winner meaning a penalty shoot-out.
Fernandinho saw his shot smack the post after Can had already scored – then Caballero saved Lucas Leiva’s penalty.
Navas kept his cool to level the scores as the tension became almost unbearable. Caballero then saved Coutinho’s tame effort. Aguero coolly converted to put the Blues ahead for the first time.
Caballero then saved Lallana’s attempt to complete an incredible hat-trick of saves and Yaya Toure completed the job by stroking home the winner to send one half of Wembley mad.
Dramatic, breath-taking and glorious – City are 2016 Capital One Cup champions but the hero of the day was undoubtedly Caballero who played, perhaps, the game of his life.