Liverpool conceded an injury-time goal which puts their Champions League future in grave doubt.
An injury-ravaged home side had produced a display of spirit and effort which did not deserve to see them finish as losers.
But they have now lost four games in succession for the first time since 1987 as their season plunges into despair.
Captain Steven Gerrard's groin problem forced him off in the first half, as Liverpool lost this Group E match to a side who now top the group with nine points.
Liverpool led at the break through Yossi Benayoun, but Lyon slowly edged their way towards victory with goals from substitutes Maxime Gonalons and Cesar Delgado.
An air of nervous tension hung over Anfield, such were the levels of distress from fans unused to their side losing with such regularity.
The beach-ball embarrassment of the defeat at Sunderland just about summed up Liverpool's indifferent season.
Their form has been poor, a situation made worse by having their squad systematically deprived of its best players.
Fernando Torres was again out, while Glen Johnson was missing with a groin injury. At least Gerrard was back - but that lasted only 25 minutes.
Teenager Martin Kelly, Whiston-born and academy produced, made his full debut at right-back, having had just a handful of minutes prior to this as a late substitute against PSV Eindhoven in Holland last December in this competition.
Facing them were a clever, experienced team - full of neat passing, solid possession and pacy movement which threatened a fragile Liverpool.
It needed a close-range save from Jose Reina to keep out a powerful header from Argentina striker Lisandro before patched-up Liverpool - who had David Ngog in Torres' role - continually wasted possession.
Former Liverpool and Lyon boss Gerard Houllier watched from the directors' box as the Reds struggled, while co-owner George Gillett was also in the posh seats, fresh from his trip to Saudi Arabia.
And there were signs of Liverpool defiance, a Dirk Kuyt headed disallowed for offside from Gerrard's deep cross.
That was virtually the only contribution from the skipper, who trudged off to be replaced by Fabio Aurelio. The groin injury sustained on England duty had given way again. No real damage we were told, but facing Manchester United on Sunday looks a long shot.
It needed a performance of defiance, spirit and sheer desire from Liverpool to survive this. And there were signs to warm the Kop.
Defender Cris was booked for a foul on Kuyt, the Dutchman's knee crashing into his head as he fell. The Brazilian did not last much longer, carried off in a daze.
Liverpool were beginning to show genuine fight now, and somehow France number two 'keeper Hugo Lloris kept out an Ngog effort after fine work by Kelly, Kuyt and Aurelio.
Aurelio had a powerful header saved by Lloris' left-hand from Kelly's run and cross, before Liverpool took a 41st minute lead.
Benayoun showed calmness to lift the ball over Lloris from eight yards, after Aurelio's cross evaded Kelly in the six-yard box.
Ngog was booked for a foul on Jeremy Toulalan, then Lyon skipper Sidney Govou was cautioned for flattening Emiliano Insua.
Benayoun, with a fine header, and Ngog - from eight-yards - could have stretched Liverpool's lead in the second period, while Lloris needed to be at full stretch to keep out Kuyt's header from Aurelio's cross.
Lyon sent on striker Bafetimbi Gomis to partner Lisandro in place of Ederson - and they began to stretch Liverpool.
Bosnian teenager Miralem Pjanic, followed relentlessly by Lucas, was starting to find space to produce the sort of tricks which have helped his country into the World Cup play-offs.
The pressure increased and Lyon equalised in the 72nd minute.
Liverpool failed to clear a corner, Reina made two outstanding saves from Toulalan and Govou before the ball reached substitute Gonalons, who dived to head home.
The hosts then lost young Kelly with an ankle injury, with Martin Skrtel taking over in a defence under increasing pressure.
Benitez sent on Andriy Voronin for Benayoun, to boos from the Kop, as Liverpool searched for a second.
But the decider came in injury-time from substitute Cesar Delgado, arriving at the far post to sidefoot past Reina from Govou's cross.