England were second best through much of the tie which saw Ashley Young and Ashley Cole miss the decisive penalties resulting in the Italians progressing to the semi finals where they will face Germany.
Despite going out, Roy Hodgson and his team will take great credit in their defensive displays which saw them frustrate the Italians for 120 minutes.
For the opening 20 minutes of the first half, early chances were exchanged for both sides. It was almost a terrible start for England as De Rossi unleashed a swerving left footed half volley which cannoned off Hart's post. Moments later it was England who almost took the lead with Glen Johnson being denied by Gigi Buffon's strong left hand.
Good combination play between, Johnson, Ashley Young and James Milner, saw the Man City midfielder's cross arrive at Johnson's feet who did well to scoop an effort from six yards, only to see Buffon deny him a goal.
With the pressure coming from England, Italy started to work their way into the game with Andrea Pirlo pulling the strings from midfield. Pirlo's ball over the top was collected by Mario Balotelli whose attempted chip was well blocked by the on rushing John Terry.
Pirlo was once again involved in Italy's next chance of the half. The Juventus man sent over a delicious far post ball which was headed across goal by Cassano. With Balotelli waiting for an easy tap in, he could only watch as he was denied by his club team mate Joleon Lescott who cleared the ball over his own crossbar.
Despite losing control of the game, England created one more chance before the break. Having played with each other all season at Old Trafford, the combination of Welbeck and Rooney engineered a chance for Welbeck who could only side foot his shot wide, when really he should have done better.
Italy continued their dominance after the break with Pirlo continually bossing the midfield. Having hit the post in the second half, De Rossi tried his luck again from range. This time Hart palmed it straight to Balotelli, whose shot was saved by the legs of the goal keeper. With the goal gaping, Montolivo managed to hit the second rebound over the bar.
England once again escaped going behind as De Rossi shot wide from the easiest of positions after he had been set up by the head of Marchisio.
With the team tiring and pinned back into their own half, Hodgson made the first move bringing Theo Walcott and Andy Carroll on for Milner and Welbeck. Both were involved in England's notable chance in the second half when Ashley Young's goal bound shot was blocked by the Italian defence out for a corner.
With extra time looming, Italy brought on ex West Ham man Alessandro Diamanti who was denied by a sharp stop from Joe Hart. Glen Johnson did well to deny sub Nocerino when his goal bound shot looked set for the net. At the other end, Wayne Rooney nearly stole it for England as his overhead kick went miles over the bar after Andy Carroll had nodded the ball back across goal.
With extra time to be played, England looked shattered and happy to settle for a penalty shoot out. Scott Parker was replaced by Jordan Henderson to freshen up the midfield early on in the first half.
With England ahead after the first two penalties, belief started to build that we would make the semis. But after a nonchalant chip from Pirlo to draw the Italians level, Ashley Young saw his penalty smack the bar. Nocerino converted Italy's fourth penalty meaning Ashley Cole needed to score England's next penalty.
Having converted his spot kick in the recent Champions League final, Cole could only stare in disbelief as his kick was saved by Buffon. Up stepped Diamanti knowing if he found the net, he would knock England out. Sending Hart the wrong way, Diamanti ran with his team mates to celebrate the deserved win with Buffon and a semi final tie with Germany on Thursday.
For England, the same old story of losing in a quarter final on penalties continues, but with little expectation before the tournament, England have made some progress. Having only had little time to prepare before the tournament, Roy Hodgson will have great hope for the future of the England team.
England: Hart, G.Johnson, Terry, Lescott, A.Cole, Gerrard, Parker (Henderson 94') Milner (Walcott 60') Young, Rooney, Welbeck (Carroll 61')
Italy: Buffon, Balzaretti, Abate (Maggio 90') Barzagli, Bonucci, Marchisio, De Rossi (Nocerino 80') Montolivo, Pirlo, Balotelli, Cassano (Diamanti 78')
Referee: Pedro Proenca (Portugal)