Reds boss Rafa Benitez handed a starting spot to striker Peter Crouch, who partnered Fernando Torres in attack, while Arsene Wenger fielded Emmanuel Adebayor as a lone striker.
The Gunners made the brighter start and were rewarded for their efforts in the 13th minute with the opening goal.
A fluent attack ended with Jose Reina blocking Adebayor's effort, but when the ball was played back into the area by Alex Hleb, Abou Diaby ran in on the right to lash a low shot past Reina at his near post.
Arsenal took charge of the game after breaking the deadlock, with Reina forced into action to deny both Emmanuel Eboue and Adebayor, but the Reds hit back on the half-hour.
Manuel Almunia had to tip away a deflected cross from Fabio Aurelio and from the resulting corner the unmarked Sami Hyypia buried a superb header back towards the near post from at least 12 yards out.
Liverpool then upped the pace towards half-time, while Arsenal were forced to replace the injured Mathieu Flamini, with Gilberto Silva taking over.
The home side maintained the upper hand in the early part of the second half and 21 minutes from time looked to have struck a decisive blow, when Torres took down a long ball forward, turned his marker and smashed a superb shot past the stranded Almunia.
Adebayor spurned a clear chance a matter of minutes later, but he made no mistake six minutes from the end to make the aggregate score 3-3 and put the Gunners in the ascendancy on away goals.
Sub Theo Walcott made an amazing break from deep inside his own half, leaving a succession of defenders in his wake, before presenting Adebayor with an unmissable chance from 12 yards.
However, within a minute Liverpool won a penalty as Ryan Babel crumpled under the challenge of Toure and Steven Gerrard kept his cool to bury the spot-kick to Almunia's right.
Arsenal's misery was complete deep into stoppage time as Babel raced clear to power home a shot from just inside the area, with Chelsea again lying in wait for Liverpool in the last four.