However, despite Georginio Wijnaldum's miss costing his side, Liverpool boss Jurgen Klopp will take positives from his side's performance - especially in the second half - against last season's league champions.
Liverpool hit back with Roberto Firmino firing a volley on the turn straight at Claudio Bravo, before Mohamed Salah failed to find the target with a first-time effort from 15 yards after more good play from Firmino.
City were dealt a blow in the 10th minute when Sane was forced off with what appeared to be a knee injury, but despite momentarily having a man disadvantage, the Premier League champions took the lead.
Opportunities continued to be created on a regular basis, with Salah firing wide from an acute angle at one end and Sterling seeing a shot from inside the area saved by Alisson at the other.
As both teams acknowledged that they needed to improve at the back, chances began to dry up, although Salah should have done better with a volley after a poor clearance from Zinchenko.
While the reminder of the opening 45 minutes passed by without incident, Pep Guardiola was cautioned by the referee for his unnecessary complaints after a 50-50 challenge between Gomez and David Silva.
City picked up where they left off after the restart as David Silva fizzed a half-volley over the crossbar, but Liverpool quickly got to grips with the pace of the game to cause their opponents more trouble.
The Champions League winners thought that they had equalised shortly before the hour mark when Virgil van Dijk's volley beat Bravo and struck the underside of the crossbar, but replays indicated that only half of the ball had crossed the line.
Salah then struck the post with a 20-yard drive as Liverpool kept the pressure on their opponents, but City should have soon doubled their advantage on the break, only for Sterling to allow the ball to run through to Alisson when contemplating a pass.
Liverpool remained in the ascendancy with Salah seeing a low effort palmed away by Bravo, although Liverpool soon found a deserved equaliser when Matip was on hand to power a header into the net from close range after meeting a Van Dijk cross.
Klopp made a further three alterations and one of them - Naby Keita - should have perhaps put Liverpool in front with a first-time effort from 15 yards, only for the impressive Bravo to punch the ball away from danger.
Liverpool pressed forward as four minutes of added-on time were indicated, and only an acrobatic goal-line clearance from Kyle Walker prevented Salah's header from bouncing into an empty net.
A high-quality shootout followed with Wijnaldum's early miss gifting City the advantage, and Pep Guardiola watched Gabriel Jesus convert the decisive spot kick to earn City yet another piece of silverware.
LIVERPOOL (4-3-3): Alisson; Alexander-Arnold (Matip 67'), Gomez, Van Dijk, Robertson; Fabinho (Keita 67'), Henderson (Lallana 79'), Wijnaldum; Salah, Origi (Oxlade-Chamberlain 79'), Firmino (Shaqiri 79')
MANCHESTER CITY (4-3-3): Bravo; Walker, Stones, Otamendi, Zinchenko; Rodri, D.Silva (Gundogan 61'), De Bruyne (Foden 89'); Bernardo, Sane (Jesus 13'), Sterling body check tags ::