The Reds made a late comeback in the second half after Fernandinho scored City’s opener in the first half.
However, Brazil international Philippe Coutinho levelled with 10 minutes remaining to force the final into extra-time at Wembley.
But Liverpool, who had won two penalty shootouts en route to the showpiece, lost 3-1 as Philippe Coutinho, Lucas Leiva and Adam Lallana missed their spot-kicks.
Former Reds striker Fowler couldn’t hide his disappointment following Sunday’s result.
We need a Wembley of the north…… Long journey home… Longer when you lose
— Robbie Fowler (@Robbie9Fowler) February 28, 2016
Liverpool host Manuel Pellegrini’s side in the Premier League at Anfield on Sunday afternoon.
The Reds are in ninth place and nine points behind the Citizens in the race to secure a place in next season’s Champions League.
Liverpool will face bitter rivals Manchester United in the Europa League last 16 after Thursday night’s 1-0 win against Augsburg sealed their progression.
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