Extra time would seemingly be required to separate the two sides following goals from Tommaso Baldanzi and Alfie Devine, but an 87th-minute penalty from Chelsea's Cesare Casadei broke the Three Lions' hearts.
With only eight minutes on the clock, Giuseppe Ambrosino sliced the England defence open with a sumptuous outside-of-the-foot pass, and Baldanzi proceeded to poke home the opener into the bottom corner.
Matthew Cox arguably should have done better in the England goal, as the Brentford youngster let the ball slip through his grasp, but Italy's lead would last for all of 16 minutes.
Not long after rattling the bar with a thunderous close-range effort, Tottenham Hotspur midfielder Devine met Dane Scarlett's cross and connected with a fine side-footed volley to restore parity for Ian Foster's team.
However, Casadei would come to the Azzurrini's rescue, as after his long-range attempt struck the hand of Liverpool defender Jarell Quansah inside the area, the 20-year-old found the top corner with a bullet of a penalty for his fifth goal of the tournament, keeping him at the top of the scoring charts.
England - who won the 2017 Under-20 World Cup in what was their most recent appearance - could not conjure up a response in the dying embers, and Italy will now face Colombia for a spot in the semi-finals.