Sami Hyppia, 30, cancelled out Abou Diaby's early lead, 13, before Fernando Torres put Liverpool in front for the first time in the game in the 69th minute.
Emmanuel Adebayor leveled the score in the 84th minute. Not for too long as Steven Gerrard, 84, and Ryan Babbel, 86, secured the victory and the semi-final spot.
Arsenal had a better start and broke the deadlock when Alexander Hleb slipped a short pass into the penalty area allowing Diaby to open the scoring.
The Gunners maintained their pressure but failed to extend their lead as Adebayor and Clichy's efforts were blocked by keeper Jose Reina.
After the early shocker, the Reds seemed to realize they are losing on aggregate and it took them some time to respond when Hyppia leveled the scoring, placing a perfect header from Gerrard's corner.
Gilberto replaced injured Mathieu Flamini just before the break.
Peter Crouch had an effort on goal but Manuel Almunia made a brilliant save. Arsenal were no longer the dominant force.
And finally the home side's effort paid off in the 69th minute when Torres skipped his marker Senderos and turned sharply before firing an unstoppable shot into the top corner.
Four minutes later Adebayor was clear on target but he missed from close range. The whole drama started in the last 10 minutes of the game.
The Togolese striker almost sent the Gunners into the semis with six minutes to go as he struck the equalizer after a brilliant run from substitute Theo Walcott who set him up.
Captain Gerrard relieved the fans when he restored Liverpool's advantage from the spot following a clumsy challenge from Kolo Toure on Babbel.
The Dutchman got his name also on the scoresheet in stoppage time to take Liverpool to the semi-finals for the third time in four seasons.
Liverpool will face Chelsea in the Champions League semi-final.