Liverpool started brightly, with young midfielder Darren Potter having two strikes sail over the bar in the first-half while Morientes and Gerrard both had decent efforts saved by Julian Speroni.
At the other end, however, Clinton Morrison – starting alongside Dougie Freedman in the absence of Johnson – proved a menacing presence for Hyypia and his colleagues in white to deal with, while only a controversial advantage called denied Tom Soares the chance to run in on goal.
Then, eight minutes before half-time, lift-off for Palace: a diagonal ball from Michael Hughes found Freedman on the charge, and the striker deftly nodded the ball back across goal to put his team into the lead.
Perhaps to be expected, Liverpool and Gerrard responded immediately, the midfielder supplying a cute finish after a loose ball broke towards him on the edge of the box.
An end-to-end encounter continued to entertain after the interval, with Morientes and Potter both going close once more while the Eagles saw multiple penalty appeals denied at the Holmesdale Road end.
Then, in the 66th minute, the upset was sealed: another brilliant, stabbed cross from Hughes picked out Marco Reich, and the winger pushed a finish past Scott Carson to set up an unlikely victory.
Crouch twice went close, second-half substitute Luis Garcia threatened and four minutes of injury-time siege ensued, but Palace held on to claim their second-ever victory over European champions – the first being versus Nottingham Forest in November 1979.
Victory ensured Palace a place in the fourth round of the competition, where they fell 2-1 to Middlesbrough at the Riverside.
**Palace:** Speroni (GK), Borrowdale, Hudson, Fitz Hall, Boyce, Watson, Soares, Hughes, Reich (Togwell, 84), Freedman (Black, 77), Morrison (Andrews, 74)
Subs not used: Kiraly (GK), Ward
**Liverpool:** Carson, Raven, Hyypia, Whitbread, Warnock (Traore, 76), Potter, Gerrard, Hamann, Kewell (Luis Garcia, 65), Morientes (Sinama Pongolle, 62), Crouch
Subs Not Used: Reina (GK), Josemi