Having led at half-time, two goals in the first 13 minutes of the second half saw Palace exit the FA Cup for another year at the hands of Liverpool.
It looked as though a quarter-final spot was on the cards when Fraizer Campbell scored his second goal in four days to hand the hosts the lead, but strikes from England pair Daniel Sturridge and Adam Lallana at the start of the second half turned the game around and saw the Reds progress instead of the red and blue.
After a cagey opening, the first chance of the game fell for the Eagles and they grabbed it. A long ball down the middle of the pitch by Joe Ledley caused problems and when Martin Skrtel inadvertently flicked the ball back Dwight Gayle pounced and forced Simon Mignolet into a reaction stop, but the ball fell for Campbell to force home the rebound.
The visitors came back and forced Julian Speroni into a good stop when some intricate passing between Philippe Coutinho, Jordan Henderson and Adam Lallana around the edge of the Palace box allowed the latter to control and shoot but the Argentinian pushed the ball around the post, with Skrtel heading the resulting corner wide.
He had an easier save to make when Coutinho shot straight at him after Scott Dann had produced a brilliant block with his midriff inside the area, but once again Speroni had to be at his best when Henderson attempted a blast from just outside the box, before Joe Allen saw a volley fizz narrowly wide of the far upright as the Reds piled on the pressure.
But Palace were looking threatening on the counter and after Yannick Bolasie attempted to thread Gayle in the ball ricocheted off Skrtel to hand the striker a on-on-one opportunity but Mignolet pulled off a good save with his feet to divert the ball away and ensure Palace were just a goal ahead at the break.
Jason Puncheon replaced Marouane Chamakh at half-time and he had a chance to find the net within a minute of entering the fray but blazed over the top from the edge of the box, but five minutes of the restart Brendan Rodgers' side had drawn level.
Joe Allen had time to pick out Henderson in the middle of the park, and the midfielder clipped a pass over the back of the Eagles defence for Sturridge who volleyed through Speroni's legs with unerring timing and accuracy to notch the equaliser.
Having scored in every game he'd previously played against Liverpool, Gayle came close to extending that record when a corner was cleared out of the area to Joel Ward who headed it back into the mixer, and when it was drilled into the striker's path he forced Mignolet to get down low and shovel the ball out.
However on 57 minutes the Reds turned the game on its head. The visitors won a free-kick on the edge of the box and substitute Mario Balotelli hammered the ball through a gap in the wall that Skrtel created which Speroni managed to beat away, but Lallana was waiting to gleefully drill the ball into the ungraded net.
After that the Reds dictated the game, Rodgers shuffling his pack and playing a more defensive formation to see out the game, and the Eagles could only conjure up a late free-kick that Gayle drove over the crossbar as they exited the cup at the fifth round stage.
Palace: Speroni, Kelly (Guedioura 63), Dann, Hangeland, Soaure, Bolasie (Zaha 71), Ward, Ledley, Gayle, Chamakh (Puncheon 46), Campbell. Subs: Hennessey, Mariappa, Delaney, Murray.
Liverpool: Mignolet, Sakho, Skrtel, Can, Moreno, Lallana, Allen, Henderson, Coutinho (Lovren 77), Sturridge (Lambert 77), Markovic (Balotelli 46). Subs: Ward, Johnson, Manquillo, Borini.