After opening the scoring less than 10 minutes into the game, the All Whites kept their lead until the 29th minute when Italy put away a penalty to equalise.
Surviving through the second half as Italy took corner after corner, New Zealand held on for the fulltime whistle, when their white-clad fans went crazy in the stands and their Italian counterparts sat long-faced.
The All Whites completed a lap of honour, saluting their supporters, and coach Ricki Herbert crossed the centre of the pitch to embrace his players one by one.
"How many times do I have to say it? These boys just keep responding and they've done it again tonight," Herbert said immediately after the game.
"It's the most incredible result we've had across the board. As a football coach, it's way above anything we've achieved in the history of the game.
"We are always daring to dream. At the World Cup anything is possible -- we've seen some strange results -- but nothing as big as that one."
Herbert praised the team's resilience following on from their shock seventh-minute goal, when striker Shane Smeltz poked home an inswinging free kick from Simon Elliott.
The European side put their point on the board 22 minutes later, when New Zealand's Tommy Smith was called for tugging the shirt of Daniele De Rossi, who tumbled in the box, and Vincenzo Iaquinta slotted the penalty past goalkeeper Mark Paston.
Herbert said his side's play was tight and organised, as they battled through 15 corners from Italy as they were awarded none.
Guatemalan referee Carlos Batres handed yellow cards to three New Zealanders, including Rory Fallon, who Herbert substituted for 18-year-old Chris Wood in the 63rd minute.
"I took Rory off because he's going to be crucial," he said.
"Some of the decisions were, I don't know, quite strange and for some reason he was on the back end of a lot of them, so no need to risk him."
Smith and skipper Ryan Nelsen were also carded. Italy were called for 11 fouls, while New Zealand racked up 25.
Having drawn 1-1 with Slovakia to snare their first-ever World Cup point last Tuesday, this morning's win puts the All Whites in true contention to move past the group stage of the competition.
"We're going to be bloody hard to beat I'll tell you that. It's fantastic, I mean the guys deserve it and the nation's going to round three with us," Herbert said when asked about the team's chances against Paraguay later this week.
Nelsen, whose mind was also turned to the Friday morning game, praised his team's efforts.
"We've given ourselves an opportunity it's exciting. That's all we wanted to do, give ourselves that opportunity," he said.
"Paraguay are just as good as Italy, they're an amazing team, so we're going to have to recover and do it all again."
