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Palace edged the first half in terms of possession and half chances. After only six minutes Dele Adebola headed wide from Andy Johnson's cross while at the other end too much was asked from the unmarked Michael Owen as he stretched to reach a header and the ball drifted over the bar.
On 25 minutes the Reds lost keeper Chris Kirkland after he collided with Adebola to prevent the Eagles hit man in another promising Palace raid.
After the break Liverpool moved up a gear and for a good 30 minutes showed their Premiership class, but their finishing was lacking.
Palace were pinned back and were given an uncomfortable time, the home side had a miraculous escape when Julian Gray covering back and with no danger side-footed past his own keeper, Alex Kolinko, and could only watch as the ball fortunately ran past the post.
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Owen and Emile Heskey had shots blocked before Palace took a grip and suddenly the game turned around with Palace dominating the final 15 minutes.
Despite all their efforts and Liverpool desperately conceding numerous corners and free kicks Palace could not find the net.
Tony Popovic could have clinched the tie but his close-range header took a deflection and it proved just enough, as the ball bounced over the crossbar.
Palace boss Trevor Francis commented: "The team applied themselves very well and we played with an air of enthusiasm. If we were going to do it, it would have been in the first half.
"We have done ourselves proud, played with spirit and plenty of attitude. We have become a very tough team to beat, we have good shape and it is difficult to break us down."
Gerard Houllier, the Liverpool manager said: "It was a hard game, but fair. We knew it would be hard work and it was. Today was a matter of mental strength and professional attitude, the players were prepared and they were very focused.
"There were times when we had to withstand the pressure especially towards the end but we rose to the occasion and I thought we earned the replay."