Amid muggy conditions in the Amazon rainforest city, Claudio Marchisio drilled Italy in front in the 35th minute, only for Daniel Sturridge to equalise two minutes later after a sweeping England counter-attack.
With 19-year-old Liverpool winger Raheem Sterling to the fore, England displayed plenty of endeavour, but they were ultimately undone by former Manchester City striker Balotelli’s goal shortly after half-time.
His header prevented England from avenging their defeat on penalties by Italy in the quarter-finals of Euro 2012 and left Cesare Prandelli’s side well placed ahead of Friday’s meeting with Costa Rica — shock 3-1 victors against Uruguay earlier in the day — in Recife.
England manager Roy Hodgson will have drawn encouragement from his youthful side’s attacking vigour, but victory against a hurting Uruguay will now be imperative when the teams collide in Sao Paulo on Thursday.
While Salvatore Sirigu deputised for the injured Gianluigi Buffon in goal for Italy, Hodgson sprang something of a surprise by fielding Sterling as a number 10, which obliged Wayne Rooney to play on the left.
Sterling was quick to catch the eye at the Amazonia Arena, lashing a 30-yard shot into the side netting, and his example encouraged Jordan Henderson to test Sirigu at his near post with a powerful strike.
As England continued to press, Sterling drilled a cross across goal, before Italy centre-back Andrea Barzagli toed a centre from Danny Welbeck across the face of his own goal and wide.
England seemed to be building up a head of steam, but perhaps emboldened by their fortune, Italy went ahead.
– Sterling’s glorious pass –
Following a short corner on the right, Andrea Pirlo cleverly dummied a pass from Marco Verratti for Marchisio, who exploited oceans of space to steady himself and drive a shot into the bottom-left corner from 20 yards.
If England felt hard done-by, they did not show it, for within two minutes they were level thanks to a goal of delightful simplicity.
Sterling’s glorious pass released Rooney on the left and the Manchester United man dispatched a delicately weighted left-foot cross that Sturridge crashed home on the half-volley.
England’s celebrations were not without complications, however, as team physiotherapist Gary Lewin had to be stretchered away from the touchline after hurting his ankle amid the jubilation.
Italy finished the first half on top, Phil Jagielka heading off the line from Balotelli, before Antonio Candreva hit the post with a snapshot, and it was to prove an ominous portent of things to come.
After Sirigu had parried a low strike from Sturridge, in the 50th minute Candreva cut inside Leighton Baines with embarrassing ease on the Italy right and crossed for Balotelli to nod his side ahead from close range.
Prandelli stiffened his midfield by introducing Thiago Motta in place of Verratti, while Hodgson pitched Everton youngster Ross Barkley into the fray as England went in search of an equaliser.
Steven Gerrard was denied a penalty following a body-check by Gabriel Paletta, before Rooney lashed wide and Sirigu saved from Barkley and Baines, but as the game wore on and the humidity began to weigh even more heavily, so England faded.
Pirlo even came close to inflating Italy’s lead with a languidly struck injury-time free-kick, but the ball hit the bar.