Back to form Owen scored a brilliant hat-trick, his first goals in open play in 11 games for Liverpool this season.
And Owen's goals provided a great boost for Liverpool as they prepare for their make or break Champions' League match against Spartak Moscow in midweek.
"I told Michael he had nothing to prove and to simply go out and be himself," explained Liverpool manager Houllier, who added that Owen had had the support of everyone at the club through his lean spell.
"It is good to have your main striker scoring three goals days before such a match," declared Houllier.
While Liverpool had plenty to celebrate, as they remain unbeaten in the Premiership, City were left to reflect on a defeat which sees them slip worryingly close to the bottom three.
City manager Kevin Keegan admitted his side had been beaten fairly and squarely, saying: "It was a harsh lesson and our form at the moment is that of a relegation team and the way we are playing we could not be good enough for the Premiership."
The Reds ought to have added to their tally, but were thwarted by City keeper Peter Schmeichel who made super saves to deny both Sami Hyypia and Owen.
The visitors had to wait until midway through the second half before scoring the second goal which effectively sealed victory.
Steven Gerrard's inch-perfect pass split the City defence as Owen beat the offside trap, bursting clear to slot the ball home low to the left of Schmeichel.
Owen rounded off a memorable day by completing his treble in the final minute with another fine solo effort.
The striker ran onto a long throughball, shook off a challenge from City defender Sun Jihai before striking a fierce shot, which went in off the upright high to the left of Schmeichel.