Brendan Rodgers sent out a vastly inexperienced Liverpool side, leaving out the likes of Gerrard, Sterling and Balotelli, but they gave a good account of themselves in a narrow defeat.
It was the home side who inevitably started on the front foot and James forced a smart stop from Simon Mignolet immediately after he found himself losing his marker on the edge of the box.
Liverpool weathered that early pressure however and looked remarkably calm in possession given how inexperienced the side was playing against arguably the best team in the world.
Despite this, they were nearly the cause of their own downfall on 10 minutes when Martin Skrtel gave the ball away to Karim Benzema, who teed up Ronaldo to call Mignolet into another fantastic stop from point blank range.
The visitors were proving hard to break down at the back as Madrid cranked up the pressure, enjoying more and more of the ball in the Liverpool half.
Indeed, Liverpool asked a few questions of the Madrid rearguard themselves, with Borini and Markovic making smart runs in behind.
Iker Casillas, making a record 144th Champions League appearance, was a bystander in the Real goal throughout the first period though and midway through the half his side took a deserved lead.
Marcelo overlapped from left-back and whipped in a delicious ball, where Benzema was on hand to stab the ball into the top corner making his scoring record against Liverpool in 2014 3 goals in 2 games.
Liverpool could easily have keeled over after that as the half progressed, but they held their own and limited Madrid to a handful of shots.
Ronaldo, who was looking to equal Raul’s 71 record goals haul in the Champions League, had a glorious opportunity just before half time to double the lead, but failed to connect with Luka Modric’s pinpoint pass.
Liverpool, against all the odds, went in at the break just a goal behind with everything still to play for.
Madrid came out all guns blazing in the second period and Ronaldo almost had the goal he craved, but for the fists of Mignolet again palming his shot away.
Liverpool again rode their luck and had shots of their own from Alberto Moreno and Adam Lallana who both went close.
Their hosts always looked the more dangerous outfit though and another gem of a cross from Marcelo teed up Benzema again, only for the Frenchman to sky his effort.
Rodgers sent on Gerrard and Sterling late on, but their introduction was almost made a pointless task just a minute later when substitute Gareth Bale rattled the bar for Real.
Madrid were knocking on the Liverpool door in attemp to finish the game off with time running out, but Ronaldo and company couldn’t add to their tally as Liverpool pushed to find an equaliser.
The home side had to settle for a slender win in the end, but the victory sees them progress to the latter stages of the competition.
As for Liverpool, despite Brendan Rodgers seemingly kamikaze team selection for the game didn’t result in a heavy defeat, it still resulted in a third straight defeat in Europe for the first time since 1968.
Two wins in their final two games should be enough to see them through, but they can afford no more slip ups if they are to join Madrid in the last 16.
Real Madrid: Casillas: Arbeloa (Nacho 83), Ramos, Varane, Marcelo; Modric, Kroos; James (Bale 61), Isco, Ronaldo; Benzema (Javier Hernandez 86)
Liverpool: Mignolet; Manquillo, Toure, Skrtel, Moreno; Lucas (Gerrard 69), Allen; Can (Coutinho 74), Lallana, Markovic (Sterling 69); Borini.