Luke Shaw had put the hosts ahead in the second minute, ushering in unbridled scenes of joy, but as England sat back, it offered Italy a route back into the game with Leonardo Bonucci levelling from a 67th minute corner.
After a goalless and uneventful 30 minutes of extra-time, the match went to penalties where England had the early advantage after Jordan Pickford saved Andrea Belotti’s effort.
But England missed spotkicks from Marcus Rashford and Jadon Sancho, both substituted on late in extra-time for their ability from the spot, handing the initiative to the Azzurri.
Chelsea midfielder Jorginho had the chance to win it for Italy but his penalty was saved on to the post by Pickford, meaning England could send it to sudden death.
However, 19-year-old Bukayo Saka had his penalty saved by Italian goalkeeper Gianluigi Donnarumma who was the hero.
“We have done something extraordinary. We are happy. We didn’t give up a millimetre,” Donnarumma said. “You all know where we started from. We are a fantastic team and we deserve it.”
Italy boss Roberto Mancini admitted luck played its part in the shootout, offering respect to his opponents.
“You have to have a little luck on penalties. I feel a little sorry for England, because they also had a great tournament,” Mancini said.
“The team has grown a lot and I think we can improve further. We are very happy for all Italians. I have no words for these guys.”
Mancini’s triumph marks a dramatic rise for Italy who failed to qualify for the 2018 World Cup, in one of the darkest hour’s for the Azzurri.
“It was impossible even to just consider this at one stage, but the guys were just amazing,” Mancini said.
“I have no words for them, this is a wonderful group. This was a difficult game made a lot harder after their early goal. Apart from that early spell, we dominated the match.”