Rapid-fire strikes from Hector Bellerin, Mesut Ozil and Alexis Sanchez sent the Gunners well on their way to a convincing victory before the first half was up.
And although Jordan Henderson pulled a goal back from the penalty spot late in the second period, Liverpool were reduced to 10-men when defender Emre Can was dismissed for a second bookable offense.
Arsenal added another goal through Olivier Giroud shortly after.
The 4-1 result moves Arsenal into second position ahead of Manchester City which doesn't play until Monday.
For Liverpool, it leaves qualification to the Champions League looking increasingly unlikely. With just seven games of the season remaining, The Reds could be as many as eight points behind fourth-placed Manchester United who occupy the final qualification spot by the end of Saturday.
'It was a game we needed to take something from,' a philosophical Liverpool boss Brendan Rodgers told BT Sport after the match. 'Today is a big disappointment, but we didn't defend well enough in key moments of the game.'
If only the buildup to this lunchtime fixture could have been assessed with such clarity. Much of the pre-match conversation had centered around Liverpool's young striker Raheem Sterling.
The 20-year-old, who recently broke off talks over a new contract, spoke out in a controversial interview earlier in the week, cryptically describing how he would be reassessing his options at the end of the season.
Pacey and skillful, intelligent and freakishly strong for one so slender, Sterling is undoubtedly one of England's most exciting talents. In the absence of Luis Suarez, who was sold to Barcelona last year, and Daniel Sturridge, who has been injured for much of this season, Sterling has often been Liverpool's most potent attacking weapon.
Early on, he did much to emphasize just why Liverpool do not want to let him go. Sterling would have opened the scoring had Lazar Markovic been more careful in squaring to his onrushing teammate when clear through on the Arsenal goal.
The deadlock was soon to be broken at the other end of the field, however.
Full-back Hector Bellerin glided past Alberto Moreno in the 37th minute, waltzing on into the Liverpool area unchallenged where he took aim and curled the ball beyond Simon Mignolet.
The goal was against the run of play. Liverpool had had the better of proceedings up until that point with Sterling and Philippe Coutinho both going close through long range efforts.
But it was to fall two behind just two minutes later. Ozil stepped up after Alexis was fouled to expertly place a well-controlled free-kick into the bottom of Mignolet's right-hand corner from 23-yards out.
Liverpool was now well and truly stunned. And things were to get worse for before the half was out.
Alexis latched on to Olivier Giroud's pass at the edge of the Liverpool area after 44 minutes before lashing the ball beyond Mignolet once more.
Brendan Rodgers' men had gone 13 EPL games undefeated until a 2-1 home defeat last time out by arch rival Manchester United. Now they were staring down the barrel of a second EPL loss on the bounce.
Rodgers brought on England international forward Sturridge to try and breathe some new life to his flagging side.
And while they did stem the flow of goals, Arsenal was first to come close in the second period as Giroud rose to bullet a header that Mignolet did well to fist away.
Yet Liverpool persevered under pressure and found a way back into the game when Bellerin felled Sterling in the penalty area after 77 minutes. Henderson, captain in the absence of the suspended Steven Gerrard, stepped up and smashed the ball low past Arsenal goalkeeper David Ospina who got a hand to the midfielder's strike.
In times past, Arsenal have been criticized for wilting under the slightest of pressure. Liverpool sought to expose these mental fragilities by pushing for a second goal that would have made for a grandstand finish.
A second yellow card for Emre Can, however, reduced the Merseysiders to 10-men just when it was looking to put the squeeze on its opponents.
The German defender seemed to lose his footing as went to challenge Arsenal substitute Danny Welbeck. But referee Anthony Taylor brushed away complaints from Can and his teammates before brandishing the second yellow and subsequent red card.
With a comeback now highly unlikely, Arsenal made absolutely sure of the win when in-form striker Giroud curled home with a delightful strike in injury time.
Speaking after the game, a satisfied Gunners boss, Arsene Wenger, said 'It was a very great day. We had the chance to make a difference with Liverpool and we took the chance.'
'Their keeper kept them in the game and then they had a good chance before we scored, but we were focused, clinical, and I think if you look at the table and see the number of goals we score, it's no coincidence.'
The Gunners have now won nine EPL fixtures on the trot, and although overhauling league leaders Chelsea will likely be a bridge too far, they could finish as runners up for the first time since season 2004/05.
Arsenal also has the semifinals and defense of its FA Cup to look forward to.
After another tough season when high expectations have not always been met, there may be a silver lining in store if Wenger's men can maintain this impressive form.
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