Leroy Sane grabbed the winner as Manchester City edged an enthralling top-of-the-table clash to reignite the title race with a 2-1 victory over leaders Liverpool at Etihad Stadium.
The Germany international rifled a superb low drive in off the far post 18 minutes from time after Roberto Firmino had headed the Mersysiders level with his 10th goal of the campaign.
Sergio Aguero had given the hosts a first-half lead, slamming in a venomous strike from a narrow angle on 40 minutes to snare his 250th career league goal and make it seven in seven home games against the Reds.
Sergio Aguero of Manchester City celebrates after scoring his team's first goal during the Premier League match between Manchester City and Liverpool FC at the Etihad Stadium on January 3, 2019 in Manchester, United Kingdom.
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The result gives Pep Guardiola his 100th win as City boss and moves the reigning champions up to second place. City are now four points adrift of Jurgen Klopp's side and very much in contention following their mini festive blip that saw them slump to back-to-back league defeats for the first time in two years.
Liverpool will rue a big opportunity with the game still scoreless, when Sadio Mane's shot came back off the post. John Stones then somehow cleared off the line in the ensuing melee after the defender had cannoned a desperate clearance against his own goalkeeper, Ederson.
It was a significant moment in the match, but in truth, City deservedly inflicted a first Premier League defeat of the campaign on the Reds with Aguero, Bernardo Silva and Raheem Sterling all missing chances late on.
Next up, Liverpool visit Wolves in the third round of the FA Cup, while City host Rotherham prior to the first leg of their EFL Cup semi final with Burton.
The title race is well and truly on. It proved to be the encounter that everyone was hoping for and was not without plenty of drama. It's only the start of January and there are still 17 league games to play, but this was most certainly a hugely significant clash in this term's title race. If City had lost they would have been a massive 10 points adrift of the Reds.
As it stands, the champions have reignited their hope and belief of becoming the first side in 10 years to retain the trophy. Liverpool will lick their wounds and go again following a first league loss of the campaign. Klopp and Co will be keen to remind themselves that no team has ever failed to lift the title having taken such a convincing lead into the New Year and they remain four points ahead despite this defeat.
Georginio Wijnaldum of Liverpool makes a pass as Bernardo Silva of Manchester City closes him down during the Premier League match between Manchester City and Liverpool FC at the Etihad Stadium on January 3, 2019 in Manchester, United Kingdom.
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They will now look to bounce back following FA Cup duty, when they visit Brighton on January 12th, while City will be buoyant. Guardiola didn't hide from the fact it was pretty much must-win, and will be keen to see how the Reds deal with their first major setback when they return to league duty.
MAN OF THE MATCH
Fernandinho (Man City). Imperious at the heart of the midfield. The Brazilian's industry was matched by a fine range of passing. He is so often overlooked amid the array of stars in the City team, but his recent absence proved once again just how vital he is to their success.
18' - LIVERPOOL HIT THE WOODWORK! Liverpool rip through the City defence as Salah exchanges a sublime one-two with Firmino before sending Mane clear. The Senegalese takes aim but sees his low shot cannon back off the far post. Stones then hacks a panicked clearance against Ederson and is forced to somehow clear off his own line. Incredible.
40' - GOAL! Man City 1-0 Liverpool. Aguero gives City the lead. The Argentine lashes in a rising shot from a tight angle after taking a superb touch to take Bernardo Silva's left-wing cross away from Lovren.
63' - LIVERPOOL CHANCE! Ederson comes way off his line to punch a free kick clear, but is beaten to it by Kompany. Firmino latches on to the error, but can't get his shot from the right side of the box beyond a sea of City bodies near their goal-line.
64' - GOAL! Man City 1-1 Liverpool. The Merseysiders pull level. Firmino nods home Robertson's volleyed cross after Alexander-Arnold had picked out his fellow full-back's run with a raking cross from the right.
72' - GOAL! Man City 2-1 Liverpool. City regain the lead! Sane takes Sterling's pass in his stride and rifles a low drive in off the far post from the edge of the area.
Roberto Firmino of Liverpool celebrates after scoring his team's first goal with his team mates during the Premier League match between Manchester City and Liverpool FC at the Etihad Stadium on January 3, 2019 in Manchester, United Kingdom.
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82' - MAN CITY CHANCE! Almost three. Sterling leads a lightning City break. It's fed to Aguero who appears to round Alisson before seeing his shot towards an empty net blocked by the out-stretched arms of the keeper. Super recovery from the Brazilian.
83' - LIVERPOOL CHANCE! Salah pulls free on the left of the box but sees his low shot brilliantly tipped past the far post by Ederson.
90' - MAN CITY CHANCE! It should be over. Bernardo Silva sees a close-range drive beaten away by Alisson, with Sterling fizzing the rebound just wide.
Firmino has scored four goals in his last two league games for Liverpool as many as in his previous 23 matches for the Reds.
Four of Leroy Sane’s 22 PL goals have been v Liverpool - more than against any other side.
Sané has been directly involved in 26 goals (9 goals and 17 assists) in 25 league games at the Etihad Stadium since the beginning of last season.
Man City are the first team to score 2+ goals against Liverpool in 24 PL matches, since West Brom in April 2018.