Match reportU18s exit FA Youth Cup after seven-goal thriller with Chelsea
The young Reds took a 3-0 lead in the fifth-round tie at the Academy thanks to finishes from Luke Chambers, Kaide Gordon and Oakley Cannonier.
But they were pegged back as the visitors staged a comeback late in the second half, with substitute Tudor Mendel Idowu completing the turnaround when he netted in the 94th minute to clinch a spot in the quarter-finals.
The hosts' promising start to the tie was rewarded with a fifth-minute goal.
Melkamu Frauendorf's pass through the legs of a Chelsea player sent Chambers free on the left channel. The captain proceeded to carry possession into the penalty area and concluded the run by thrashing a finish beyond Prince Adegoke.
Roles were reversed in the 18th minute when the goalscorer played in his assister, only on this occasion Frauendorf dragged his shot fractionally wide.
Liverpool goalkeeper Harvey Davies then made two saves to deny Edwin Anderson and Jude Soonsup-Bell. Those interventions proved to be crucial when his side doubled their advantage seven minutes before half-time.
James Balagizi immediately turned when he received a pass inside the Chelsea half and found Gordon's run into the box. Brushing off a challenge from a blue shirt, the No.10 calmly directed a low finish in at Adegoke's near post to make it 2-0.
In the 58th minute, a save from Davies again preceded another goal for the Reds. The stopper tipped over Silko Thomas' close-range shot for a corner, which was then successfully cleared.
The ball upfield produced a rapid Liverpool counter-attack, resulting in Frauendorf setting Cannonier up for a one-on-one and the striker making no mistake in front of goal.
Chelsea continued to search for a route back into the contest and were given hope when Charlie Webster's deflected curler beat Davies with around 20 minutes remaining.
Their belief grew even more when Soonsup-Bell got in front of Davies to nod in Lewis Hall's cross.
And as they increased the pressure, the Londoners grabbed a fortuitous leveller four minutes before the end of the 90. Isaac Mabaya's attempted clearance of a cross into the box cannoned off Malik Mothersille and ended up in the back of the net.
Both teams pressed hard for a winner in a frantic, end-to-end finish, and Chelsea ended up making their final opportunity count to secure a dramatic win.
Mothersille was involved again and it was his cross that Idowu stretched to meet, getting enough on a poked finish to beat Davies for the game's seventh and final goal.
Liverpool U18s: Davies, Davidson, Miles, Jonas (McConnell, 75), Chambers, Mabaya, Balagizi, Clark (Pilling, 90+), Gordon, Frauendorf, Cannonier (Blair, 80).
Unused substitutes: Hewitson, Lucky, Gyimah.