Alessandro Diamanti scored the winning penalty for Italy after Ashley Young missed and Ashley Cole's effort was saved by Gianluigi Buffon, RIA Novosti reported.
It was just reward for a dominating Italian display throughout the goalless regular and extra time, with Cesare Prandelli's side traveling to Warsaw for Thursday's semifinal.
Roy Hodgson's side exit the tournament with a record of two wins, one draw and one defeat.
According to Xinhua news agency, following was the result of Euro 2012 quarter-final between England and Italy as watched by a crowd of about 60,000 people in the stadium here Sunday:
England 0 Italy 0
Italy win 4-2 on penalties
Italy: Mario Balotelli, Andrea Pirlo, Antonio Nocerino, Alessandro Diamanti
England: Steven Gerrard, Wayne Rooney
England: Joe Hart - Glen Johnson, John Terry, Joleon Lescott, Ashley Cole - James Milner (Theo Walcott 61), Steven Gerrard (captain), Wayne Rooney, Scott Parker (Jordan Henderson 94), Ashley Young - Daniel Welbeck (Andrew Carroll 60)
Italy: Gianluigi Buffon (captain) - Ignazio Abate (Christian Maggio 90+1), Andrea Barzagli, Leonardo Bonucci, Federico Balzaretti - Claudio Marchisio, Andrea Pirlo, Riccardo Montolivo - Daniele De Rossi (Antonio Nocerino 80) - Antonio Cassano (Alessandro Diamanti 78), Mario Balotelli
Yellow cards: Andrea Barzagli (82), Christian Maggio (93)
Referee: Pedro Proenca (POR)