Great Britain missed out on a first Davis Cup semi-final in 33 years after Italy fought back to win 3-2 in Naples.
The visitors led 2-1 going into the final day, but Fabio Fognini kept the tie alive by outplaying Andy Murray to win 6-3 6-3 6-4 on the clay.
It came down to a decisive fifth rubber and world number 34 Andreas Seppi beat James Ward, ranked 161, 6-4 6-3 6-4.
Italy go on to face Switzerland in the last four, while Britain will return to World Group round one in 2015.
Captain Leon Smith has led Britain through their best campaign in 28 years, but after Murray and Colin Fleming teamed up to they were within sight of a first semi-final since 1981.
Their best hope of achieving that appeared to rest with Murray in the fourth rubber, but the Wimbledon champion was no match for Fognini on a clay court.
"He played some great stuff at important periods in the match and that was the main difference," Murray told BBC Sport.
"When I had my main opportunities I was a little bit disappointed in myself, and when he had his he was exceptional, so credit to him."
Ward had produced one of the shocks of the 2014 Davis Cup when he beat Sam Querrey in Britain's first-round win over the United States, but he could not match that effort in Naples.
The Londoner, 27, fought back from a break down three times in the early stages against Seppi, but after a rain delay Ward was broken for a fourth time to drop the set.
Seppi moved ahead at 4-2 in the second set with a dipping forehand that caught out Ward at the net, and when the Briton fell a double-break behind in the third there was no way back.
Despite obvious nerves, Seppi served out the tie to the delight of the home crowd as Italy returned to the semi-finals for the first time since 1998.
"Losing is never easy, despite going up against a very strong Italian team," Smith told BBC Sport.
"I'm very proud of what the team has done this weekend and getting to this stage of the competition. It gives us something to build on, learn from, and we can just keep improving as a team and staff so that we can get ready for the 2015 campaign."
Fognini, 26, had always been expected to provide Murray with a serious test in Sunday's opening rubber after a year that has seen him win three titles on clay and rise to a career-high ranking of 13.
Murray looked the more solid in the opening stages, breaking immediately after a wayward Fognini forehand, but at 3-1 down the Italian was riled by the chanting of the British supporters, and it fired him up.
After complaining to the umpire and throwing his water bottle in anger, Fognini broke back to love and raced through five straight games to take the set.
Murray, 26, looked shell-shocked, double-faulting to lose serve for the second time and clearly unhappy with the crowd noise between serves.
He was hanging on early in the second set as Fognini continued to play inspired tennis but the Scot saved two break points at 1-1, and had a chance to work his way back into the contest in game six.
Two backhands into the net on break points proved costly for Murray, however, and when he sent a backhand long to drop serve in the following game he faced a daunting task.
With a two-set lead and the vocal Neapolitan crowd behind him, Fognini kept up the pressure in the third and earned match points with the first break points of the set at 0-40 in game 10.
Murray fended off the first two but dumped a forehand in the net on the third, and a victorious Fognini cupped his hand to his ear in celebration.
"Today I just played better than Andy," Fognini told BBC Sport. "We know this sport really is difficult and Andy played a lot yesterday. I just focused on my game and tried and do my best."
Murray insisted he did not feel the effects of playing two singles and a doubles match in 24 hours, saying: "I did OK physically in the match. I've definitely felt worse on clay."
Asked about the crowd noise, he added: "It was a Davis Cup atmosphere. We don't get that on a day-to-day basis on the ATP Tour, but when you play away from home you get that.
"I just asked one time for the captain [Corrado Barazzutti] not to speak while I was serving because he was right there on the court, but it's not a major issue."