The title-the first for Liverpool Youth team after 12 years-came in a penalty shoot-out after a 1-1 draw in regular time.
With City senior team on course to deny Liverpool a first Premier League title with three games of the season to go, the Reds at least ensured silverware for their Under-18 side with the triumph at the Etihad Campus.
It is City's fourth final defeat in five seasons, having been denied by Chelsea in 2015, 2016 and 2017, while it is Liverpool's first success since they overcame Manchester United on spot-kicks in 2007.
With Pep Guardiola watching on, the hosts were largely the superior side from the outset and deservedly went ahead when Nabil Touaizi converted Adrian Bernabe's low cross from the left.
City could not build on their advantage, though, and was made to pay four minutes from the end of normal time when goalkeeper Louie Moulden allowed Bobby Duncan's strike to slip through his grasp.
Penalties beckoned as neither side failed to find a breakthrough in extra-time and, in a shoot-out of high quality, Cole Palmer was the only player to miss, crashing his effort against the crossbar.
Liverpool captain Paul Glatzel dispatched the decisive kick to give his side a 5-3 win and start the celebrations.