Sam Kerr's debut World Cup goal put Australia ahead in Valenciennes, where the Matildas enjoyed the run of the match only to come unstuck, with Barbara Bonansea's double earning the underdogs a precious three points.
Bonansea pounced on a Clare Polkinghorne blunder to equalise, before leaping for a 95th-minute winner amid Australian desolation.
A draw looked the right result at the Stade du Hainaut, where the Italians showed their worthiness to be on the world stage after a 20-year drought.
Less than a minute remained when Italy won a free kick in the corner, allowing the Juventus winger to jump above Kerr in the box and put a header past Lydia Williams.
Kerr threw off her armband in despair on the full-time whistle as the Italian bench exploded onto the pitch.
Again, Ante Milicic's side had fallen victim to their inability to finish chances.
Australia had 17 shots across the match, Italy just five.
The loss isn't terminal for the Matildas' hopes of being a contender in France, though the team now requires a result in their second match with Brazil in four days time.
A ninth-minute blunder though would show signs of what was to come.
Bonansea broke free of the Australian defence and poked an effort past Williams, only to be deemed offside after a long review.
It shocked Australia into action.
Livewire full-back Ellie Carpenter, Australia's best, was giving the side energy and provided a cross for the breakthrough.
The curling pass was bound for Kerr, who found herself wrapped in a bear hug from opposing skipper Sara Gama.
Handed a chance to break her World Cup duck from the spot, her effort was saved by Laura Giuliani, but Kerr tapped in the rebound.
After the penalty, Australia were rolling.
Chloe Logarzo might have added a second with a pair of headers, while Hayley Raso had an close-range effort.
At the other end, Williams made a point-blank save to deny Cristiana Girelli.
The Italians showed no signs of giving up, though their equaliser came in unfortunate circumstances.
Polkinghorne, returning to the World Cup after not playing in 2015, took a heavy touch to allow Bonansea to steal in, bear down on goal and finish.
Substitute Daniela Sabatino put the ball in the net but again, Italy were denied by the offside flag.
They would not be held back in injury time, securing a result to send the blue-clad fans among 15,380 in attendance into rapture.
Source AAP
