Balotelli scored the decisive goal for the Azzurri five minutes into the second half after Daniel Sturridge had cancelled out a Claudio Marchisio effort.
At times England were simply breathtaking on the attack. Raheem Sterling, making just his third England start, wowed the crowd inside the Arena Amazonia with his quick thinking and even quicker feet.
Sterling, Danny Welbeck and Jordan Henderson all went close in the first half as a bold, young and bright England went for Italy from the first whistle.
Roy Hodgson's men also had two good penalty shouts turned down and their passing, until the last 10 minutes, was incredibly fluent.
But defensive shortcomings cost the team again. Marchisio was, inexplicably, left unmarked and he took full advantage by driving Italy ahead from outside the box.
And then Gary Cahill lost Balotelli at the back post to put Italy ahead for a second time -- after Sturridge had equalised following a brilliant England counter-attack.
Wayne Rooney's critics will also be given further ammunition after he missed two good chances.
Any snap conclusions should not be made about England's fate. Their World Cup is not over just yet, especially with Costa Rica having beaten Uruguay in the other Group D fixture earlier on Saturday.
But the Three Lions will have to sharpen up at the back fast -- particularly with Luis Suarez due to appear against Hodgson's side on Thursday in Sao Paulo.
The atmosphere was electric at kick-off. After clocking up over 12,000 air miles and taking the advice of nutritionists, video analysts, sports scientists and a psychiatrist, the time had come for England to "walk the walk'' as captain Steven Gerrard put it.
Hodgson had spoken of Sterling's "breathtaking'' performances in training this week and the Liverpool midfielder left the 2,500 England fans inside the stadium gasping for air in the second minute.
Sterling picked the ball up 40 yards out and took 10 paces forward before blasting a right-footed shot which rippled the side-netting past the flying Salvatore Sirigu, who was standing in for the injured Gianluigi Buffon.
England's explosive start continued moments later when Henderson unleashed a low shot that Sirigu scrambled across his line to save. More was to come. Welbeck, the sweat already glistening on his forehead, let fly with a low drive which skimmed the turf and flew inches wide.
It was a dynamite opening which was in keeping with the thrilling start to the World Cup as a whole. The Italians were struggling to keep pace with England's electric attack, but they did pierce the Three Lions' box on a couple of occasions.
Andrea Pirlo thought he should have had a penalty when his chip clipped Glen Johnson's arm. England had their own call for a spot-kick turned down a few minutes later when Andrea Barzagli and Gabriel Paletta blocked Welbeck's path into the box.
All the good work went down the drain when England left Marchisio unmarked on the edge of the box, however. Pirlo dummied Marco Verratti's corner and his Juventus team-mate drove past three England defenders into Joe Hart's net.
Marchisio raced for the bench, where he was mobbed by the entire squad and coaching staff. Hodgson scratched his head.
Two minutes and 43 seconds later the England manager was on his feet celebrating Sturridge's equaliser.
Sterling was the architect of the move, cutting Italy's defence open with a 40-yard pass to Rooney. He looked up and found Sturridge with a lovely cross which the Liverpool man stabbed home on the half-volley.
The England bench celebrated a little too hard. Physio Gary Lewin had to be carried off on a stretcher with a dislocated ankle.
England endured a couple of nervy moments before half-time. Phil Jagielka cleared Balotelli's chip off the line and Antonio Candreva hit a post.
But Hodgson's men clung on, and they started the second period as they did the first. Sturridge pelted a low 20-yard drive which Sirigu pushed away.
Once again, though, the good work went to waste as slack marking allowed Italy to re-take the lead.
Leighton Baines was out-smarted -- not for the first time -- by Candreva, who turned and crossed for Balotelli, who had gained a yard on Cahill. The former Manchester City striker guided the ball past Hart and the celebrations on the Italian bench ensued once again.
Referee Bjorn Kuipers then turned down to good England penalty shouts. First Chiellini swept Welbeck's legs from beneath him and then Paletta then knocked Gerrrard over, but the referee waved play on.
Hodgson brought on Ross Barkley and, within two minutes, he had stung Sirigu's palms. Rooney had a better chance, latching on to Baines' ball, but he shot wide.
Sirigu tipped Baines' free-kick around the post and then Rooney wasted the corner that followed by slicing the ball behind the goal.
Hodgson brought Jack Wilshere on and then Adam Lallana, who replaced a limping Sturridge.
But England's passing went awry as the heat started taking its toll on the players.
The Italians kept the ball well and the final whistle blew, resulting in raucous celebrations on the Azzurri bench.
