In-form Newcastle inflicted another painful defeat on Ange Postecoglou's struggling Tottenham and Chelsea's recent woes continued with a 1-1 draw at Crystal Palace.
Mikel Arteta's Arsenal, Premier League runners-up over the past two seasons, travelled to the south coast hunting a fourth straight league win in the evening kick-off.
Seventeen-year-old Ethan Nwaneri, in for the injured Bukayo Saka, scored a first-half goal to put them on course for a vital three points.
But after being felled by an accidental headbutt from William Saliba, stand-in Seagulls captain Joao Pedro fired home from the spot in the 61st minute.
The 1-1 draw means the second-placed Gunners are five points behind Liverpool, having played two games more, with Arne Slot's in-form leaders hosting crisis-hit Manchester United on Sunday.
Arteta said his team had under-performed in the second half, failing to build momentum, adding that the penalty award was "bizarre".
"We are really disappointed with the decision that leads to the goal because I have never seen something like this in my life," the Spaniard told the BBC.
"He (Saliba) touches the ball as well."
City turned corner?
Manchester City's win at home against West Ham means they have now won successive matches for the first time since October and Pep Guardiola will hope they are back on track after a horror run of one victory in 13 games in all competitions.
The defending champions took an early lead through a Vladimir Coufal own goal and two goals from Erling Haaland put City in total command.
Phil Foden made it 4-0 before Niclas Fullkrug grabbed a consolation for Julen Lopetegui's men, who suffered a 5-0 mauling by Liverpool last week.
Despite their shocking run, sixth-placed City are just two points behind Chelsea, in fourth, but Guardiola said his team were still not back in the groove.
"I'm very pleased for the result but you cannot ask me if the old City is back," he said. "If you saw the game, we are not.
"You saw many times during the years what we have done with the opponents."
In the early kick-off, Newcastle came from behind to clinch a fifth straight Premier League win and heap more misery on injury-hit Spurs.
The home side went ahead in the fourth minute through Dominic Solanke.
Newcastle levelled two minutes later when Anthony Gordon arrowed an effort into the bottom corner, but Postecoglou stood in disbelief on the touchline looking at referee Andrew Madley after Joelinton intercepted Lucas Bergvall's pass with his hand in the build-up.
VAR deemed Joelinton's arm to be in a natural position and the contact to be accidental.
In-form Alexander Isak scored what turned out to be the winner towards the end of the first period.
The 2-1 victory, watched by new England manager Thomas Tuchel, leaves Newcastle in fifth spot, which may yet prove enough to secure a place in the Champions League next season.
But Spurs have slumped to 12th in the table after five defeats in seven matches.
Postecoglou said he was proud of his players but was the "angriest I think I have ever been in my career".
"I think it's clear," said the Australian. "Now whether people agree with me or not whether it wasn't handball or it was accidental, I'm just not interested in any of that discussion.
"I know what everyone wants me to say, but all I'll say is that on any other day, on a fair and even playing ground, we would have won that game. Simple as that."
Enzo Maresca's Chelsea were breathing down Liverpool's necks just two weeks ago but have taken just two points from four games over the festive period.
The prolific Cole Palmer gave the visitors a first-half lead, but they could not capitalise on their possession and Jean-Philippe Mateta levelled in the 82nd minute.
Aston Villa beat relegation-threatened Leicester 2-1 at home, with goals from Ross Barkley and Leon Bailey.
Brentford recorded their first league win on the road this season, smashing hapless Southampton 5-0, and Bournemouth beat Everton 1-0.
