Smith, 20, who is yet to make the first-team breakthrough at the Premier League club, will go straight into Blackpool's squad for Saturday's league game at Millwall and could make his debut.
"He's a ball-playing midfielder with a good range of passing and I'm looking forward to working with him," Blackpool boss Neil McDonald told the club's official website.
"I've seen him on a couple of occasions and I've been impressed with what he can do.
"I just think we need a little bit more variety and Liam can certainly handle the ball in tight situations and has got a good range of passing.
"Hopefully he complements the other midfield players that we've got and forces his way into the team."