Both sides had failed to find the net in 120 minutes of play, though Italy had been unfortunate not to win it well before they prevailed 4-2 on penalties as England's Ashley Young and Ashley Cole failed to convert their spot kicks.
It fell to Alessandro Diamanti to slot the winning penalty to send the 2006 World Cup winners on to a semi-final with Germany - who were beaten by the Italians in the 2006 World Cup semi-finals - in Warsaw on Thursday.
Holders Spain meet Portugal in Donetsk on Wednesday.
Whilst England had very little to offer in attack throughout the match their defence was magnificent in denying the Italians, for whom their ageless playmaker Andrea Pirlo ran the game.
Italy coach Cesare Prandelli said that penalties were a lottery but insisted the better side had won.
"We did the things we were supposed to do but then we had some luck and we did well," he said.
"When you have penalties anything can happen but we really deserved it."
Despite the result England coach Roy Hodgson was justifiably proud of his players and could look back on his first campaign in charge with a lot of satisfaction.
"I can't fault the players for their efforts, I thought we were quite magnificent. But by the end they were running on empty," he told BBC.
"We've gone out without being beaten with our heads held high and making the country proud.
"Both Ashleys were knocking in the penalties in practice but in reality practice doesn't translate into the real thing as you can't take into account energy levels that are run down, tired legs and minds.
"They got their bit of luck and it wasn't to be for us."
Hodgson, who has won over a lot of the critics here after they wondered why he had been chosen and not Harry Redknapp in May to replace Fabio Capello, who stood down earlier in the year, said he had no doubt England would move on from here.
"I'm sure we will get up among the top sides its only a matter of time if these players show the same determination that they have done so far.
"There are others to come in so it won't be long before we are up with the best and winning these sort of matches.
England skipper Steven Gerrard was equally dejected.
"The players have given eveything," he told the BBC. "I thought we might have the luck in the penalty shoot-out but it wasn't to be. The lads at the back were fantastic, we have done the country proud but we go home heartbroken and that is hard to take."
Away from the match German captain Philipp Lahm took aim at the mole within the camp who has been giving away the line-ups of their team throughout the tournament.
"It is a great pity if leaks like this occur and it is a disgrace that the line-up was in the public domain so early," said Lahm referring to the leak about the side that beat Greece 4-2 in their quarter-final.
"The whole nation is standing behind us, everyone wants to move ahead and lift the trophy.
"The person who has the problem is the guy responsible for leaking that information, because at the end of the day, he might be damaging the hopes of a nation."
The French returned home as fast as they could manage after their tame performance in the 2-0 defeat by holders Spain on Saturday with forward Samir Nasri's foul mouthed outburst at an AFP journalist casting a dark pall over their campaign.
"I did talk to Nasri about his comportment with the press but evidently the message didn't get through," said a clearly furious France coach Laurent Blanc.
"It is not very good for Nasri's image and neither is it for the team's."