Revellers set fire to the red, white and green flag in the early hours after the final whistle had blown in Manaus, Brazil.
They held the flag emblem aloft as hundreds of England supporters spilled out of the pubs around the town centre following the teams disastrous defeat.
Detectives have launched an investigation into the incident that took place in Bedford, where one in five residents is Italian - the highest proportion anywhere in the country.
When the sides last met in 2012 England lost on penalties and there were clashes on Bedford's Embankment as celebrating Italy fans were targeted.
'England fans burning Italy flags in Bedford town centre. Classy.'
'Burning Italian flags outside Yates in Bedford... Pathetic useless English again.'
Outraged Italian community leaders reacted to the flag burning with one saying it was 'like something out of the Middle East.'
Luigi Reale, who established the Bedford Italian Circle community group, said: 'To set fire to the Italian flag is completely stupid: 'This is a small minority of people and it is an extreme act. It is very negative - it's like something you would see in the Middle East with people burning the American flag.
'I'm very concerned about this and the police need to investigate quickly. This is very hurtful for Italians living in Bedford.'
