Penalties offered the Three Lions hope but, after Riccardo Montolivo fired wide, Ashley Young and Ashley Cole both failed from 12 yards to leave former West Ham forward Alessandro Diamanti as the man to step up and send Italy into a semi-final date with Germany.
Italy were almost in front inside the opening three minutes when Daniele de Rossi's deliberately sliced volley from 30 yards crashed back off the post with Joe Hart beaten.
The enigmatic Mario Balotelli had numerous chances to put Italy ahead, but was denied by a block from John Terry and then alert defending from his Manchester City team-mate Joleon Lescott.
De Rossi had a golden opportunity to put the Azzurri in front three minutes after half-time, but snatched at his shot, while Balotelli was denied by club colleague Hart and then saw an ambitious overhead kick fly over.
England retreated more and more as the game wore on and were almost punished in the first period of extra-time when Italy substitute Diamanti saw his cross come back off the post.
The Azzurri finally had the ball in the net with five minutes left of extra-time, but substitute Antonio Nocerino was fractionally offside when he stooped to head home and England held out to force a shoot-out.
Man of the match:
Andrea Pirlo. He dictated the play from start to finish and his penalty in the shoot-out smacked of a man brimming with confidence. The range of his passing and vision had England chasing shadows at times, the veteran setting up the majority of Italy's attacks with the Three Lions often powerless to resist.