With nine points from nine in the section, the Reds would have confirmed a first-placed finish with a win if LASK Linz overcame Union SG, and the Austrian side did their bit with a 3-0 triumph.
However, two weeks on from thrashing Les Violets 5-1, Liverpool were stunned in France, where Aron Donnum, Thijs Dallinga and Frank Magri rendered Cristian Casseres Jr's own goal and Diogo Jota's strike inconsequential to condemn Jurgen Klopp's side to their first continental loss of the new term, although there was a healthy dose of late drama as a last-gasp Jarell Quansah strike was disallowed.
Prior to kickoff, reassuring news emerged from Colombia, as it was confirmed that Luis Diaz's father had been released by the guerrilla group ELN 12 days after being kidnapped along with his wife.
Diaz made his first Reds start since his parents' ordeal in a new-look attack with Ben Doak and Cody Gakpo, who created the first meaningful chance of the game four minutes in as his inswinging free kick found Joe Gomez, who glanced a header onto the bar with his back to goal.
As expected, Klopp's team dominated the ball in the early exchanges, albeit without giving Guillaume Restes much to do until the 31st minute, as Doak stung the palms of his fellow teenager with a close-range volley.
However, Toulouse only needed one opportunity - and one mistake - to stun their Merseyside counterparts, as five minutes after Doak was thwarted, a dawdling Kostas Tsimikas was robbed of the ball on the left by Donnum, who advanced into the area, let fly and saw his strike deceive Caoimhin Kelleher via a slight deflection off of Quansah.
Klopp responded during the break with a triple change, introducing all of Mohamed Salah, Dominik Szoboszlai and Trent Alexander-Arnold, but those alterations did little to invoke a fire within the Reds' bellies.
Just three minutes after the restart, Gabriel Suazo spurned a glorious chance to double Toulouse's lead as he fired wide from 10 yards out, only a couple of minutes before Dallinga was adjudged to have fouled Joel Matip before slotting home.
However, the Dutch marksman was not to be denied by the linesman's flag in the 58th minute, as Diaz was crowded out on the wing, and Vincent Sierro sent in a delightful cross for Dallinga, who took a touch before unleashing a vicious low strike across Kelleher's goal.
Matip and Quansah were far too slow to react as Dallinga set himself, and things almost got worse for Liverpool when Donnum swept home in the 65th minute, but the offside flag went up against assister Niklas Schmidt.
A tepid Liverpool could not complain about the scoreline, but Klopp's side were back in the contest out of nowhere in the 73rd minute, as Gomez headed Alexander-Arnold's delivery across goal to the back stick, and a mid-air scramble ended with the ball deflecting into the net off of Casseres Jr's shoulder.
Abysmal defending soon came back to haunt Liverpool, though, as Toulouse restored their two-goal lead just three minutes later through Magri, who followed up with a first-time finish after Kelleher managed to palm Suazo's low cross out of Dallinga's path.
The visitors did manage to set up a nervy finale in the 89th minute, as Alexis Mac Allister won the ball back in midfield and fed Jota, who surged at the Toulouse backline and expertly picked out the bottom corner to cut the deficit in half.
Pandemonium then erupted in the away end as Quansah swept home a leveller in injury time, but after a lengthy delay, Mac Allister was deemed to have handled the ball in the build-up, and Liverpool were left to rue what could have been as the goal was disallowed.
While Liverpool remain top of the section, Toulouse have now cut the gap to the Reds to just two points, and the Reds will now aim to confirm a top-two finish against LASK in three days' time.
Liverpool's final game before the international break sees the Reds meet Brentford at Anfield on Sunday afternoon, while Toulouse travel to Lille at the same time in Ligue 1.