The surprise Christmas leaders were subdued and struggled to contain an energetic Liverpool side who deservedly took the points at Anfield courtesy of substitute Christian Benteke's second-half effort.
It was only Leicester's second league defeat of the season and the first time they failed to score -- with deadly duo Jamie Vardy and Riyad Mahrez, who have scored 29 of Leicester's 37 league goals this season, well shackled.
Manager Claudio Ranieri said England striker Vardy had been playing with a fever while Algerian Mahrez had been tired. Both players were substituted in the second half.
Leicester will have to recover quickly as they host Manchester City on Tuesday, a side Ranieri described as "another big rock" in the way of Leicester's ambitions.
"We started to play too late. Liverpool pushed from the beginning and for this reason they deserved to win," Ranieri, whose side have 38 points from 18 games, three more than third-placed City, said.
"We tried to do our best but maybe in the first half we were too nervous to play our football.
"The second half was much better, but it is OK. Now we have to clean our mind and get ready for the next match."
While Leicester were given a reality check, Liverpool ended a three-game Premier League winless streak during which they fell away in the hunt for a top-four finish.
Saturday's win, a healthy response to the 3-0 drubbing at Watford last time out, left them five points behind the top four and with plenty to play for.
"At halftime, we knew if we stayed concentrated we would get our chances because the players looked good and it was not too intensive for us in the first half," manager Juergen Klopp said.
His only concern was the injury to Divock Origi which hastened the arrival of Benteke.
"I hope it's not too serious, we will see," he said.
"I didn't know the word before I came to England, but 'hamstring' is the worst word of the year for me. It's always hamstring, hamstring, hamstring. That's the intensity of the game and the fixtures."
Meanwhile Diego Costa scored twice in a game for the first time this season as Chelsea drew 2-2 with Watford on Saturday but blotted his copybook with a booking that means he is banned for Monday's game at Manchester United.
The temperamental Costa, so often the London club's villain during a campaign where he has frequently looked completely off the pace, netted in the 32nd and 65th minutes to take his season's goal tally to five in the Premier League.