Tottenham's 2-1 home victory over Birmingham ensured Spurs finished fifth to claim a spot in the Europa League.
The Reds rarely troubled their hosts on an afternoon when Villa wingers Downing and Ashley Young provided the main attacking thrust.
Downing produced the one moment of quality with a deft touch and brilliant finish to decide the match in the first half as Dalglish's players appeared to run out of steam after a season which for some of them began in July in the Europa League.
It means Liverpool have failed to qualify for Europe for the first time since 1999, although many will see that as a blessing as it will give Dalglish a chance to concentrate on strengthening his squad and making a challenge to get back in the Champions League next season.
Dalglish appeared to already have one eye on the future by naming a bench which, the 31-year-old Christian Poulsen apart, had an average age of just over 19.
He also gave Joe Cole a chance to impress with his first start for two months but the England international failed to take it and he faces an uncertain future after just one season at Anfield in which he has failed to deliver.
Injured Reds captain Steven Gerrard was sat among the travelling supporters but he will have been less than impressed by a first half which was almost entirely devoid of quality or incident.
In fact, Downing's 33rd-minute goal aside it was difficult to single out anything else worthy of a mention.
Virtually substitute Marc Albrighton's first involvement having replaced Fabian Delph was to provide the right-wing cross which sailed over the defence to the unmarked Downing who took a touch before smashing a narrow-angle shot past Jose Reina via the underside of the crossbar.
Either side of that the story of the half was of niggling fouls, injuries and scrappy play.
Liverpool lost Jay Spearing barely 10 minutes into the game having been fouled moments earlier by Nigel Reo-Coker, who was booked, and was replaced by Jonjo Shelvey.
Jamie Carragher temporarily had to leave the field to have stitches in a head wound after a clash with Lucas Leiva, who came closest to scoring for the Reds with a shot from a Raul Meireles corner cleared off the line by Ashley Young.
Cole had a chance to atone for an anonymous opening 45 minutes when Lucas' lofted ball picked him out in the penalty area but he ballooned a shot well over.
The England international's disappointing afternoon was eventually ended in the 67th minute when he was replaced by David Ngog.
Just prior to that Raul Meireles should have done better when Luis Suarez's cut-back took out the sliding Kyle Walker and James Collins but former Liverpool goalkeeper Brad Friedel clawed out his shot.
Collins, substitute Gabriel Agbonlahor and Stiliyan Petrov all had chances to put the result beyond doubt as the hosts finished the stronger, with only Fabio Aurelio and Luis Suarez coming anywhere close for Liverpool.
Ashley Young's withdrawal minutes from the end saw the player, entering the last year of his contract, applaud all four sides of the ground in what looked like a farewell.
But even the prospect of losing one of their major stars could not dampen the delight of the home crowd, who could not decide whether they were happier at a first Villa Park win over the Reds since February 1998 or the demise of city rivals Birmingham.
Meanwhile Dalglish, heading into his first summer transfer window, has plenty to ponder after back-to-back defeats to end the season.
Big decisions need to be taken on some big names as he looks to revitalise his playing staff.
He may well have seen the future at Villa Park.