Walter Pandiani grabbed his second goal in three games as Birmingham secured a league double over Liverpool.
Pandiani scored from the penalty spot after Liverpool defender Sami Hyypia had tangled with his former team-mate Emile Heskey in the area.
Jermaine Pennant then crossed for Julian Gray to score his first for the club and double Birmingham's lead.
Liverpool were well below par and did not seriously threaten until Jamie Carragher's header in injury time.
The Reds went into the game knowing a victory would see them close to within two points of neighbours Everton in the race for the final Champions League spot.
But they were second best and rarely looked like gaining revenge for the defeat to Steve Bruce's side at Anfield in November.
It was a welcome three points for Birmingham, who went into the game on the back of five defeats in six games.
The home side shaded a scrappy game, that saw little goalmouth action but plenty of misplaced passes.
Despite their lack of possession Liverpool had chances to go go in front.
Steven Gerrard drove into the area and crossed but Fernando Morientes was just beaten to the ball by Matthew Upson.
Gerrard then rolled a free-kick into the path of John Arne Riise who barely made contact with a wild swipe at the ball from the edge of the area.
Morientes found the Blues defence a tough test, and when he did escape a couple of weak challenges he undid all his hard work by scuffing his shot badly.
Birmingham's best attacking threat came down the right side through on-loan winger Pennant.
He found himself clear on goal but looked less than convincing in firing straight at the body of Jerzy Dudek.
Birmingham went ahead in the 37th minute, Hyypia adjudged to have fouled Heskey when the big striker went to ground.
With the sleet beginning to fall Pandiani kept his cool to send Dudek the wrong way with a well-struck spot-kick.
Birmingham doubled their lead seven minutes later when Djimi Traore made a weak effort at clearing a hopeful ball in from Gray and the ball fell for Pennant.
The winger twisted and turned Riise before putting in a pinpoint cross for Gray to volley in from close range.
Birmingham boss Steve Bruce:
"That's the best performance since we've been in the Premiership, considering the opposition.
"We totally dominated, we created more chances and they didn't really have a shot at our goal so it's going to be an enjoyable Saturday night.
"We are very pleased and it looks as if we can start looking upwards rather than over our shoulders."
Liverpool manager Rafael Benitez:
"We didn't play well - we played a bad game.
"If the team don't play well the strikers can't play well. In my opinion the penalty killed us and we never won the second balls.
"We have time to analyse the game and prepare for the next match."
Birmingham: Maik Taylor, Melchiot (Tebily 18), Cunningham, Upson, Clapham, Pennant (Nafti 84), Johnson, Clemence, Gray, Heskey, Pandiani (Blake 89).
Subs Not Used: Bennett, Anderton.
Booked: Tebily, Heskey.
Goals: Pandiani 38 pen, Gray 45.
Liverpool: Dudek, Finnan (Pellegrino 79), Hyypia, Carragher, Traore, Baros, Hamann, Gerrard, Biscan (Smicer 45), Riise (Nunez 63), Morientes.
Subs Not Used: Warnock, Carson.
Ref: H Webb (S Yorkshire).