Roberto Mancini's men showed class in attack and defence as they extended their unbeaten run to 32 games.
However, upon a review from VAR, the goal was rightfully chalked off for offside by Slovenian official Slavko Vincic.
Despite the early frustration, Italy did eventually take lead through Nicolo Barella. The midfielder became the sixth Italian player to bag a goal at Euro 2020 as his side took control in the quarter-final contest.
Things were looking up for Mancini's men and they soon got even better as Lorenzo Insigne produced the goal of the game.
The Napoli forward curled in his effort from distance as the Italians moved 2-0 ahead in the 44th minute.
Just as both managers were preparing their half-time talks, Belgium were handed a lifeline after being awarded a penalty.
Romelu Lukaku stepped up and delivered from the spot to set up a dramatic second-half.
Roberto Martinez made a number of changes as he pushed his side on with the introduction of Dries Mertens, Nacer Chadli and Dennis Praet.
But despite numerous goalscoring opportunities, the Red Devils failed to find a breakthrough.
In the end, Italy held on to their slender lead and made it through to a historic sixth European Championship semi-final.
Stat of the day
From OptaJoe: Romelu Lukaku's penalty means that no Belgian player has scored more goals than him at either the European Championships (six) or the World Cup (five, level with Marc Wilmots).
After slaying one giant, Italy will now face another one as Spain await in the semi-final.
This huge encounter will take place at Wembley stadium in London this Tuesday night.
With 37 meetings between the two nations, this is one of the biggest fixtures in international soccer.
The two famously clashed in the final of Euro 2012 which saw Spain clinch a comprehensive 4-0 win in Kiev.
The Three Lions will play away from home for the first time in the tournament with the game taking place in Rome, Italy.
Gareth Southgate's men will be looking to achieve something that England haven't managed since 1996 - reach the semi-final of the European Championships.
However, with England managing just one win from their last four encounters against the Easter European side, a close contest is expected at Stadio Olimpico.
Both teams have enjoyed an incredible run in the tournament but both will be eager to keep their campaigns alive.
Denmark have been the story of Euro 2020 following the collapse of Christian Eriksen and their incredible comeback from that tragic situation.
The Czech Republic have made their own waves in the competition, mainly thanks to Patrik Schick's 45 metre goal against Scotland and his team's round of 16 win over the Netherlands.
Another close contest is expected when the Danes and Czechs clash in Azerbaijan.