Substitute Fiorentina striker Alberto Gilardino's 90th-minute goal made it 2-2 soon after Sean St. Ledger's spectacular header seemed to have given Ireland coach Giovanni Trapattoni an emotional win against his home nation.
Victory would have given the Irish a chance to top Group Eight in Wednesday's final round of qualifiers, but they have the consolation of a playoff place after Cyprus ended third-placed Bulgaria's hopes with a 4-1 victory at Larnaca.
Italy had a goal ruled out for offside soon after the halftime break as the Juventus offender Vincenza Iaquinta touched Giorgio Chiellini's header into the net.
Glenn Whelan had lifted the Dublin crowd with a crashing eighth-minute opening goal after a well-worked free-kick move with Liam Lawrence, but Mauro Camoranesi (Juventus player) stole in with a near-post header to level the scores 18 minutes later.
Ireland kept battling for a win that would have taken them to within a point of Italy, and went ahead in the 87th minute when St. Ledger launched himself low to meet a left-wing free-kick from substitute Stephen Hunt and head his first international goal.
But Trapattoni was left to ponder what might have been as St. Ledger allowed Iaquinta too much time in the penalty area to set up a simple sidefoot shot for Gilardino's 13th goal for his country.
