Italy goalkeeper Gianluigi Donnarumma was the hero for the Azzurri in the shootout, while substitutes Marcus Rashford, Jadon Sancho and Bukayo Saka failed to convert from the spot for England.
Luke Shaw had struck the fastest goal in a Euro final to put England ahead in the second minute. Harry Kane fed Kieran Trippier on the right and his glorious cross was drilled home first time by left back Shaw.
But Leonard Bonucci drew Italy level in the 67th when England goalkeeper Jordan Pickford pushed Marco Verratti's header against the post and Bonucci pounced to slot in the loose ball.
England remain without a major trophy since 1966.