A sad day for Liverpool and my idol, Steven Gerrard. Lyon deepened the sense of crisis surrounding Liverpool and manager Rafael Benitez as Cesar Delgado's injury-time winner left their Champions League ambitions hanging in the balance.
As the Reds slumped to a fourth successive defeat, their worst sequence since April 1987, boss Benitez was given a rare taste of the anger and frustration inside Anfield as their damaging slump continued.
And to add to the air of despair, Reds captain Steven Gerrard limped off midway through the first half with a recurrence of a groin injury.
The injury will make him a doubt for Sunday's meeting with champions Manchester United at Anfield, a game that now assumes huge significance for Benitez and his players.
Liverpool initially rallied after the departure of Gerrard and looked on course to arrest their recent slide when Yossi Benayoun put them in front as half-time approached.
But once Lyon substitute Maxime Gonalons scrambled home the equaliser after 72 minutes, Liverpool's resolve wilted and Delgado's close-range finish gave the French side a victory their late supremacy just about merited.
And it was Benitez who felt the full force of Anfield's displeasure when he contentiously replaced goalscorer Benayoun with Andriy Voronin in an attempt to snatch victory with five minutes remaining.
Loud jeering greeted the decision, and the move looked even more ill-judged when Lyon swept forward to snatch victory.
The one bright spot on a bitterly disappointing night for Liverpool was the excellent performance of young defender Martin Kelly, in for Glen Johnson, who was ruled out by a groin injury.
Liverpool gave Anfield little else to cheer, although they did show commendable spirit in their attempt to recover from the loss of Gerrard and the absence of Fernando Torres.
For all the effort the home side put in, they just did not have the weapons to hurt Lyon when they required that crucial second goal, and a central midfield partnership of Lucas and Javier Mascherano may be many things, but creative it is not.
Benitez now faces a huge task to resurrect his side's shattered morale before the champions come to Anfield.
They also know that defeat in Lyon in a fortnight would leave them battling against the odds to reach the last 16 of the Champions League - an outcome that would have devastating financial as well as footballing consequences.
Liverpool co-owner George Gillett was present at Anfield, and he will not relish the prospect of the club he is touting for sale falling at the group stage of Europe's elite competition.
Benitez was forced into a late reshuffle when Johnson was ruled out. It gave youngster Kelly the opportunity to shine and it was one he took with relish in the opening half.
Lyon, watched from the Anfield directors' box by their former coach and one-time Liverpool manager Gerard Houllier, made a lively opening and should have taken the lead after only nine minutes.
The menacing figure of Aly Cissokho provided an inviting cross for Lisandro Lopez, and while Liverpool keeper Pepe Reina did well to block his header, the striker should have done much better.
Liverpool's attempt to recover from a mini-slump suffered a major blow after 24 minutes when Gerrard, who had been a subdued figure, was forced off and walked disconsolately down the tunnel to be replaced by Fabio Aurelio.
The departure of Gerrard galvanised The Kop, who recognised Liverpool were up against it, and also a home side who had previously struggled to exert their authority on Lyon.
They almost made the vital breakthrough after 35 minutes when Lucas retrieved an overhit cross from Kelly. The Brazilian's ball caused confusion in the Lyon box and keeper Hugo Lloris was forced to make a crucial save from David Ngog.
Liverpool had to survive a further scare before breaking the deadlock, however, when a stretching Sidney Govou could not connect properly with Kim Kallstrom's raking pass.
Benayoun brought Anfield to its feet as the under-strength Reds took the lead four minutes before the interval.
Aurelio's cross evaded everyone in the area, and the Israel international took his time before sliding a composed finish beyond Lloris.
And Aurelio should have doubled the home side's lead on the stroke of half-time when he flew in on the end of a wonderful delivery from Kelly, only to see his header spectacularly turned over the bar by Lloris in front of an expectant Kop.
Benayoun was posing a real threat and he almost grabbed his second after 55 minutes with a header from Dirk Kuyt's cross that dropped just the wrong side of an upright.
Kelly was delighting a Liverpool support only too keen to encourage homegrown talent, and he was the provider again with another cross that did not get the finish it deserved from Ngog.
Liverpool were walking a fine line as they failed to extend their lead, and they were punished when substitute Gonalons, on for the injured Cris, equalised with 18 minutes left.
As mass confusion reigned in the Liverpool penalty area following a corner, Reina saved from Jeremy Toulalan and then Jean Makoun before Gonalons headed in at the third time of asking.
Benitez then made a change that was, to put it charitably, mystifying when he replaced the lively Benayoun with Voronin.
Liverpool looked likely to secure an unsatisfactory point as the game entered stoppage time - but they were even deprived of even that.
Miralem Pjanic played in Govou and he set up Delgado to arrive at the far post and turn in a goal that delivered a devastating blow to their Champions League ambitions.
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