Alessandro Diamanti scored the decisive penalty kick Sunday to send Italy through to the European Championship semifinals with a 4-2 win in the shootout following a 0-0 tie with England and a spot.
Ashley Young hit the crossbar with England's third, and Ashley Cole's attempt was saved by Gianluigi Buffon.
Italy will next play Germany in the semifinals on Thursday in Warsaw, Poland. Defending champion Spain plays Portugal on Wednesday in Donetsk, Ukraine.
Mario Balotelli, Andrea Pirlo — with an audacious slow chip-shot down the middle of the goal — and Antonio Nocerino also scored for Italy. Steven Gerrard and Wayne Rooney scored England's penalties.
The match ended 0-0 after 120 minutes of play. The Italians twice hit the post, but were also let down by poor composure in front of goal. Diamanti clipped the post with a curling cross in the 101st minute, and swept a clear shot wide in the clearest chance of the second period of extra time.
Nocerino, another substitute, thought he had scored from Diamanti's cross in the 115th but was offside.
Daniele De Rossi hit the post in the third minute, and Buffon saved a shot from Glen Johnson in the fifth.
For England, it was yet another exit from a major tournament in the quarterfinals after a penalty shootout. England lost to Portugal in the same manner at Euro 2004 and the 2006 World Cup.
"We have done the country proud but again we go home with heartbreak and it's difficult to take," said Gerrard, who played in both those previous shootout losses.
Italy dominated the match, which ended 0-0 after 120 minutes of play. The Italians twice hit the post, but were also let down by poor composure in front of goal. Diamanti clipped the post with a curling cross in the 101st minute, and swept a clear shot wide.
The first scoreless match at Euro 2012 was neither dull nor lacking good soccer.
Italy's attacking desire and creativity under coach Cesare Prandelli had playmaker Andrea Pirlo at its heart. Italy had 35 shots, compared to only nine for England.
England had briefly led the shootout after Riccardo Montolivo missed Italy's second penalty. His shot went wide of Joe Hart's right post as the England goalkeeper guessed correctly.
Rooney then sent Buffon the wrong way, firing in his spot kick to the keeper's right to give England a 2-1 lead.
The momentum shifted after Pirlo's bold piece of skill leveled at 2-2.
It had been perhaps the toughest Euro 2012 quarterfinal match to predict, and Italy and England set the tone by both coming close within five minutes.
De Rossi hit the post with a spinning left-foot shot from 25 yards, then Johnson's scooped shot from close range was swatted away by Buffon.
An intriguing match almost demanded that Balotelli take center stage. The Italy forward ran clear in the 25th, but hesitated and allowed John Terry to block his chipped shot.
Balotelli forced Hart, his teammate at Manchester City, to save an acrobatic shot, then surged between England's central defenders before putting a half-volley over the crossbar. He kicked the goal post in frustration.
Italy continued surging in the second half and De Rossi, taking a ball over his shoulder, scuffed his shot wide. De Rossi sank to his knees in obvious exasperation, and more Italian frustration quickly followed.
Three rapid-fire chances in the 52nd saw Hart beat away De Rossi's long-range shot, block Balotelli's follow-up and watch Montolivo lash the loose ball high.
England coach Roy Hodgson had to react to Italy's dominance, and sent on substitutes Andy Carroll and Theo Walcott, who both scored in a 3-2 win over Sweden.
Carroll's muscular presence created a shooting chance for Young but England still failed to convince. Rooney made little impression after an early diving header.
De Rossi was replaced by Nocerino and the substitute threatened in the 89th. He took another crafty pass from Pirlo on the run, but Johnson tracked back to block.
Deep into injury time, Italian defensive jitters created a chance for Rooney but his overhead kick sailed high.