The announcement means Birmingham, Leeds, Manchester, Newcastle and Sheffield have missed out on the chance to stage the competition next May.
The BBC said the two remaining cities, which both have riverside arena venues, had "the strongest overall offer".
A final decision will be made "within weeks", the broadcaster said.
The UK was chosen to host the 2023 contest after organisers decided it could not be staged by this year's winner, Ukraine, because of the ongoing war. The UK's singer Sam Ryder was the runner-up this May.
A hotly-contested selection process saw 20 UK cities express an interest in hosting next year's show before that was narrowed down to seven, and now a final two.
The winning location will attract thousands of visitors and the attention of around 160 million TV viewers around the world.
The original seven shortlisted cities were scored on a set of criteria including:
* "Having a suitable venue and sufficient space to deliver the requirements of the Song Contest
* "The commitment that can be made by a city or region to hosting the event, including the financial contribution
* "The strength of the cultural offer which includes off screen local and regional activity as well as showcasing Ukrainian culture and music
* "And alignment with the BBC's strategic priorities as a public service broadcaster, such as providing value to all audiences and supporting the creative economy in the UK."
Glasgow was a bookies' favourite from the off, with its OVO Hydro venue having a capacity of 14,300.
The arena would be a fitting setting in some ways after being filmed for the exterior of the venue in Will Ferrell's 2020 Netflix movie Eurovision Song Contest: The Story of Fire Saga.
And of course, Glasgow lass Lulu won the 1969 Contest with Boom Bang-a-Bang. She says it's "the perfect place... and it's about time".
Fellow Glaswegian Scott Fitzgerald came second in 1988 when he was beaten to the top spot by none other than Celine Dion.
The leader of Glasgow City Council said the city has "everything it takes" to host Eurovision.
"The competition has been very strong but Glasgow has an unrivalled track record for successfully hosting major global events," Susan Aitken said.
The city centre venue is also next to exhibition centres that could be useful for facilities like a press centre, and has a nearby station and hotels. It has previously hosted BBC Sports Personality of the Year and events during the 2014 Commonwealth Games.
The home of The Beatles has a rich musical history that attracts thousands of international visitors every year. Its past major events have included the MTV Europe Music Awards in 2008.
Sonia came second in the contest back in 1993 with Better the Devil You Know. The city has also been represented by Jemini, who sadly got nul points in 2003.
Eurovision would be staged at the 11,000-capacity dockside M&S Bank Arena, which is next to a conference centre and near the city centre's hotels and rail links.
Liverpool Mayor Joanne Anderson said she was "absolutely delighted" the city had made the final two.
"Nowhere throws a party quite like us," she tweeted. "The people, communities & businesses of our city are ready to put on a show - for Ukraine, the UK & for Europe."
Phil Harrold, the chairman of the BBC's host city selection committee, said: "Thanks to all seven cities across the UK who have demonstrated the enthusiasm and passion for Eurovision that exists right across the UK.
"We were incredibly impressed by the quality and creativity of all the city bids in what was a highly competitive field.
"The Eurovision Song Contest is a very complex event and Liverpool and Glasgow have the strongest overall offer; we will continue our discussions with them to determine the eventual host city."
Eurovision organisers say a host venue should accommodate about 10,000 spectators, be within easy reach of an international airport and have enough hotel accommodation for at least 2,000 delegates, journalists and ticket-buyers.
The venue will be needed for preparations for six to eight weeks ahead of the song contest, meaning the host city will need to move concerts and events that are already in their schedules.
That could include the likes of Sir Elton John, who has concerts in Liverpool on 22 and 23 April, and the Magic Mike arena tour, which is booked for both cities in late April.
The UK has hosted Eurovision eight times - four times in London, and in Edinburgh, Brighton, Harrogate and Birmingham.