Andrea Belotti and Marco Benassi scored within two first-half minutes, after Danny Ings had already spurned a glorious chance and Harry Kane saw one effort well saved.
Gareth Southgate’s men were unable to find a way back into the game, and Benassi added his second of the night before Nathan Redmond struck in injury-time for little consolation.
Italy’s win wasn’t enough to see them through, though, as Portugal and Sweden drew 1-1 to both go through and knock the Azzurri out.
England started brightly, with the addition of Ings to the starting line-up looking like a good move by Southgate.
Liverpool’s new signing nearly repaid the coach’s faith as Kane collected the ball and played a wonderful ball through for him, but he could only fire wide with the goal at his mercy.
Then Kane, who came into the tournament with the weight of expectation after a superb season at Tottenham, went close to getting his first of the competition after bringing down Carl Jenkinson’s superb diagonal ball with a touch to match, but his curling effort was turned away by Bardi.
England fell behind almost instantly as, on 25 minutes, the highly rated Domenico Berardi cut in from the right before swinging in a cross with his left. England’s defence was caught flat and Belotti broke the line to meet the ball with a superb volley into the top corner.
It went from bad to worse just two minutes later, when Lorenzo Cristeig was allowed to run unchallenged to the edge of the area before he found Benassi, whose right-footed effort took a deflection and evaded Jack Butland to roll into the bottom corner.
Southgate’s men were left with it all to do after the break, and they started the second half as brightly as they did the first, but again they couldn’t take their chances as Jesse Lingard – who netted the winner against Sweden – showed some lovely footwork to find some space in the area before firing wide of the target.
After an Ings flick from Redmond’s free kick flew just wide Lingard had another good chance, playing a one-two with Redmond and drilling wide of the target from 20 yards.
But it wasn’t to be for England, and they fell further behind on 72 minutes when Marcello Trotta’s hopeful hook over his head was met by Benassi, who did well to generate any power from the header and he turned it in off the post, with Butland unable to stop it at full stretch.
Italy looked to be heading through when Portugal went ahead late on, but news of a Sweden equaliser filtered through as Redmond fired in a consolation goal from 20 yards after good work by substitute Ruben Loftus-Cheek, and the Azzurri also failed to make it out of Group B despite picking up four points.