The Gunners were in dire need of a win to boost any chance of making it into a European spot but fell to a disappointing 3-0 defeat at their Emirates home.
They sit ninth in the Premier League and are now seven points behind the Reds, who executed the perfect game plan in north London.
The Gunners lacked any creativity and had no idea what to do with the ball past the halfway line with Pierre-Emerick Aubameyang and Alexandre Lacazette anonymous in attack.
And Arteta was furious with his side – admitting he was somewhat stunned at what he had just watched.
He told Sky Sports: “We completely deserved to lose the game.
“They were better in every department and deserved to win the game with the margin they had, or even more. I accept responsibility for the way we played today.
“They made the right decisions, we didn’t. It is my fault. I have to set the team up to perform in a different way and that is it.
“Congratulations to Liverpool because they were exceptional today. That showed the difference between the two teams – that when they play at that level, the margin is incredibly high.
“I don’t have to use any excuses – that we don’t have five or six players – the standards are much higher at this football club and I have to get them to perform at that level.
“It was technical as well. We gave every ball away and could not put three passes together.
“The basics weren’t there today. If you do that against this kind of opponent, you get punished like we have.
“At the moment I am in shock. I didn’t expect that because of the way the team trained. It is a challenge.
“A challenge brings an opportunity. If you have courage and you represent a club like this, you have to stand up and take it.”
Ultimately, it was a night to forget for Arteta as substitute Diogo Jota scored twice on a routine night for the fallen Premier League champions.
Manchester City’s win at Leicester earlier in the day meant Liverpool’s hopes of retaining their title are now mathematically over after a season of mixed performances, poor results and terrible injury problems.
But Jurgen Klopp’s side were at their scintillating best, dominating an Arsenal side missing a number of their own key players to secure victory courtesy of a brace from Jota either side of a Mohamed Salah strike.
This was Arteta’s 50th Premier League fixture in charge of Arsenal and before the game he called for the Gunners to take the game to Liverpool, having won the corresponding fixture last year with a mixture of guile, guts and luck.
But Liverpool were on top from the get-go as the visitors showed their class – specifically in midfield where Thiago and Fabinho were at their best.
Arsenal sorely missed their injured quartet of David Luiz, Granit Xhaka, Bukayo Saka and Emile Smith Rowe – who would have all been likely starters on what would prove to be a galling night for the FA Cup holders.
Indeed, the Reds dominated for large parts of the affair and ultimately left north London with a deserved three points.