Leicester deepened the crisis engulfing Liverpool as three late goals took the Foxes into second in the Premier League with a 3-1 win at the King Power and allowed Manchester City the chance to pull further clear of the defending champions on Saturday.
Jurgen Klopp's men have now lost three consecutive games and could find themselves down in sixth by the time Chelsea and West Ham play winnable home games on Monday night.
The Reds looked to have responded to a 4-1 thrashing handed out by City in their last outing with an impressive performance until a collapse in the final 12 minutes.
Two blunders from Alisson Becker gifted City goals last weekend and the Brazilian was at fault again, while new signing Ozan Kabak had a difficult debut at centre-back.
Liverpool's superiority for the first three quarters of the game was rewarded by a brilliant team goal as Roberto Firmino's flick was curled home by Mohamed Salah 23 minutes from time.
But unlike the relentless winning machine that picked up 196 points in the past two seasons, Liverpool's confidence is now brittle and they self-imploded after Leicester's fortunate equaliser from James Maddison's free-kick.
The visitors felt Daniel Amartey should have been ruled offside for obstructing Alisson's view, but a VAR review deemed the Ghanaian to be onside.
Alisson should have done better in any case to deal with Maddison's shot and less than two minutes later he handed Leicester a second.
A long ball over the top should have been comfortably dealt with, but the onrushing goalkeeper got in Kabak's way and the defender's rushed clearance allowed Vardy to run the ball into an empty net.
"The two goals we conceded obviously had a massive impact and for human beings that’s normal, but for us we don’t accept that," said Klopp. "We have to react differently."
Four minutes later, Kabak's lack of pace was exposed as Harvey Barnes raced clear to make it 3-1.
Liverpool are now clinging onto a place in the top four as they lead Chelsea and West Ham by just a point, who both have a game in hand.
A first victory for Brendan Rodgers over his former club since being sacked by Liverpool in 2015 means Leicester move six points clear of the Reds as they edge closer to a Champions League return.
"It was a real collective team performance," said Rodgers. "You can see the improvement in the team's mindset. Our reaction was superb."
Tottenham can haul themselves back into the top four battle later, but have a mountain to climb against a City side on a record-breaking 15-game winning run at the Etihad.
Pep Guardiola's men have not lost in 22 matches since they last faced Spurs and can open up a seven-point lead at the top of the table.
At the other end, Burnley pulled further clear of the bottom three with a dominant 3-0 win at Crystal Palace.
Johann Berg Gudmundsson and Jay Rodriguez struck inside the first 10 minutes on an afternoon to forget for the Eagles.
Matt Lowton then added a stunning third just after half-time as the right-back fired home his first goal since 2016 on the volley.
Sean Dyche's men moved up to 15th with a 10-point gap now between Newcastle just outside the relegation zone and Fulham in 18th,