Boro striker Mitchell Curry netted twice - either side of a goal from former Liverpool defender Tom Brewitt - to knock the young Reds out at Bishop Auckland's Heritage Park.
Matty Virtue pulled one back midway through a second half the visitors enjoyed the better of, but the damage was already done and Curry spurned the chance to complete his hat-trick by blazing a late penalty over the crossbar.
International commitments meant Neil Critchley was unable to call on a number of regulars for the tie, but first-team full-back Nathaniel Clyne completed 90 minutes as he continues his comeback from a long-term back injury.
Curry’s well-struck opening goal arrived with just 46 seconds on the clock, and Brewitt went close to doubling Boro’s early advantage when he cleared the bar with a volley from an out-swinging free-kick.
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Slowly but surely, though, Critchley's side gained a foothold in the game.
Nat Phillips glanced Herbie Kane’s corner wide before Bobby Adekanye’s direct burst through the centre ended with a tame shot.
Rafa Camacho then curled narrowly off target and Virtue - eligible to play despite being on loan at Notts County - forced Boro goalkeeper Zak Hemming into a sharp save from close range when he ghosted in at the back post to get on the end of Tony Gallacher’s dangerous delivery.
But the visitors’ growing momentum was checked eight minutes before the break when Brewitt slotted into an open net after Adam Bogdan, under pressure in a crowded 18-yard box, failed to gather a cross.
That setback was responded to positively, with Camacho bringing a fine stop out of Hemming and Yan Dhanda sending a free-kick wide, but Liverpool could not halve the deficit before the break.
And, by the hour mark, Curry had made it three by accelerating clear and sneaking a low shot under the onrushing Bogdan.
Fine work from Toni Gomes down the right enabled Virtue to sweep home with 25 minutes to go, and Hemming again intervened when Adekanye shot powerfully following a driving run from deep.
But Liverpool had left themselves with too much ground to make up and the final scoreline would have been more convincing for the hosts had Curry converted an 84th-minute spot-kick, awarded after Phillips had felled Luke Armstrong in the area.
Liverpool U23s: Bogdan, Clyne, Phillips, Masterson, Gallacher (Johnston 71’), Kane, Virtue, Adekanye, Dhanda, Camacho, Gomes.
Unused subs: George, R Williams, Sharif, McAuley.