Last night's 1-0 defeat at Arsenal - where the Reds have not won for a decade - along with a similar reverse for Tottenham at Wolves and Aston Villa's goalless draw with Manchester United handed the initiative to City.
They are level on points with fourth-placed Liverpool but have two matches in hand and the fixture list pitches the two together at Eastlands a week on Sunday.
With third place now seemingly a distant hope after the Gunners extended their advantage to eight points Gerrard has called for all efforts to be put into beating Roberto Mancini's side.
"We have got to use a lot of positives from the (Arsenal) match," he said.
"There are plenty of teams who go there and get played off the park. I certainly feel disappointed leaving with nothing.
"We played against a fantastic Arsenal team with quality players who can open up any team in the world, and they did not really create many chances.
"It was just one mistake in our defence and they scored from it.
"The way we played over the 90 minutes, we certainly deserved a point.
"The lads are gutted after putting in all that effort and getting nothing, but sometimes that happens and you just have to get on with it.
"There is nothing we can do about this result now. The lads will reflect on it and we have a very big game coming up against Manchester City.
"But if we play like we did at Arsenal, then I fancy us to beat them.
"I feel if we are on our game and playing well, we are a match for anyone."
An eighth defeat of the season - two more than last year when they ran champions Manchester United a close second - is one of the most damaging statistics for Liverpool.
Seven of those came in the first four months of the campaign. By contrast, Manchester City have lost four and none so far at Eastlands.
The Liverpool captain knows their early form has cost them dearly but held up their seven-match unbeaten league run which came to an end at the Emirates Stadium as a yardstick for the remainder of the season.
"We are where we are in the table because we were very inconsistent earlier in the season," said the England international.
"But look at Liverpool's performances over the last six or seven games - if we show that consistency, then we will challenge for the league."
Gerrard's form has, like the team's, been patchy this season with niggling injuries preventing him from putting in the kind of inspirational performances he has gained a reputation for.
He now feels he is close to getting back to his best but said it was little consolation if it was not benefiting the team.
"I am really happy with the way I played myself [at Arsenal] but I get nothing from that because we came away with nothing," added the 28-year-old.
"But my form is improving."
Off the field manager Rafael Benitez said a deal to sign Standard Liege forward Milan Jovanovic was still to be completed.
The Serbia international, out of contract in the summer, told a Belgian newspaper yesterday the two parties had reached an agreement and all he had to do was complete a medical.
"There are a lot of rumours in the press but we are working and we will say something if we finalise things," said the Liverpool boss.
"At this moment we are talking with people and we are working."
Liverpool's non-involvement in the this week's FA Cup fifth round may come as a blessing in disguise as he currently has defensive worries.
With the in-form Sotirios Kyrgiakos still to serve two matches of a suspension, fellow defender Jamie Carragher was substituted with an injury last night.
Benitez is hopeful the extra few days' rest will allow his vice-captain to make a full recovery before the trip to Manchester City.
"Carra has a problem with his adductor. It's not serious, but we will have to see," said the Spaniard.
"He couldn't play on and we will see in the next few days how he feels."
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