Emmanuel Adebayor headed his 24th goal of the season to give the home side the lead after a cagey start.
But Dirk Kuyt hit back for Liverpool with his sixth European goal of the campaign.
Arsenal boss Arsene Wenger restored Adebayor to the starting line-up at the Emirates Stadium.
Arsenal also opted for Phillippe Senderos in the centre of defence, with Kolo Toure on the right of defence.
Javier Mascherano returned to the visitors' midfield after suspension, while Fabio Aurelio replaced John Arne Riise at left-back.
Jamie Carragher continued in his unfamiliar right-back slot, allowing veteran Finn Sami Hyypia to continue in central defence.
After a slow, cagey opening, the game almost had a shock opening goal after seven minutes when Jose Reina came rushing out of his goal as Adebayor surged clear.
Reina missed the ball but the Togo striker himself too far into the corner and when he tried an angled shot Reina - still out of his box - blocked it with an outstretched leg.
That sparked Arsenal into life and their passing and movement became crisper which forced Liverpool to defend deeper.
The atmosphere was electric, befitting two giants going for European glory in front of a packed, glittering stadium rocking with noise.
Liverpool responded with a Steven Gerrard free-kick that Manuel Almunia made a mess of, before a Xabi Alonso long ball almost set Hyypia clear in the box, Cesc Fabregas getting in a crucial challenge.
Arsenal's quality and flow started to stretch Liverpool, with Robin van Persie twice going close. First, he ran onto a Flamini long pass and clipped the ball on the rise over Reina and the bar.
A minute later Reina was down at full stretch to his left to turn another low drive wide from the Dutchman. And from that corner, Arsenal were ahead.
Van Persie played a short-corner to Fabregas before lifting it into the box. Adebayor stepped backwards and away from his marker to power home a fine header after 22 minutes.
But Liverpool hit back with a cracker of their own four minutes later. Gerrard picked up possession on the left and drove into the box, going past two defenders before leaving Toure flat-footed with a surge of power.
He then drilled over a low cross that Dirk Kuyt forced over the line under pressure from Gael Clichy, his sixth European goal of the season from 10 in total.
Ryan Babel tested Almunia from 20 yards and Torres' chip caused chaos on the far post with both Hyypia and Gerrard threatening to unhinge the Gunners again.
Arsenal: Almunia, Toure, Gallas, Senderos, Clichy, Eboue, Flamini, Fabregas, Hleb, Van Persie, Adebayor. Subs: Lehmann, Diaby, Song Billong, Silva, Bendtner, Justin Hoyte, Walcott.
Liverpool: Reina, Carragher, Skrtel, Hyypia, Aurelio, Mascherano, Alonso, Kuyt, Gerrard, Babel, Torres. Subs: Itandje, Riise, Voronin, Benayoun, Crouch, Arbeloa, Lucas.
Referee: Pieter Vink (Holland)
