Daniel Sturridge's strike had put England level after Claudio Marchisio had put the 2006 champions in front with a powerful strike from the edge of the area.
But midway through the second-half former Manchester City star Balotelli headed home at the far post and Italy held on despite some late England pressure.
Roy Hodgson's men now face a crunch game against Uruguay on Thursday in Sao Paulo where defeat could knock them out.
Speaking after the game to the BBC, England captain Steven Gerrard said: "Italy are a good team, we knew how they would play and they never surprised us.
"It's disappointing to come away with nothing. We were criticised two years ago for sitting back and being toothless but we were trying to create tonight.
"We were unlucky to get nothing out of it.
"The chances were there, we created them. We need to finish a few more off but we can't point any fingers. We gave everything."
Millions of fans packed out pubs and living rooms to stay up late and cheer on Gerrard and his men on back home.
Over 30,000 pubs were given special permission to stay open late for the 11pm kick-off.
The night took a bizarre twist soon after Sturridge equalised when England team physio Gary Lewin suffered a broken ankle after treading on a water bottle while celebrating.
The former Arsenal medic was stretchered from the dugout with his fellow backroom staff as well as the England substitutes clearly concerned about his condition.
While millions watched on back home, some 5,000 fans had travelled to Manaus to witness England's opening game first hand.
Many spent the day drinking and mingling outside the Amazonian city's central opera house.
Earlier in the day the Prime Minister had joined in the patriotic mood by raising a St George's cross over the Prime Minister's residence at number 10 Downing Street
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