Italy were rocked when Shane Smeltz gave New Zealand a controversial early lead but Vincenzo Iaquinta equalised from the penalty spot after 29 minutes.
An Azzuri onslaught followed but the All Whites, marshalled superbly by their captain Ryan Nelsen, held firm to produce one of the most surprising results in World Cup history.
Despite having 17 shots to New Zealand's three and having all 15 corners in the match, Italy could not find a way past the team ranked 78th in the world.
Italy went behind after seven minutes when Smeltz gave New Zealand a shock lead.
The former AFC Wimbledon and Halifax striker was clearly in an offside position when Winston Reid flicked on Simon Elliot's deep free-kick into the penalty area but he cared little as the ball bounced off the thigh of Fabio Cannavaro, allowing Smeltz to poke past static Italian reserve keeper Federico Marchetti from close range.
The Azzuri predictably then laid siege to the Kiwi goal.
Giorgio Chiellini spurned a golden chance when a corner bounced off Cannavaro and into his path but his attempted dink into the corner drifted wide from eight yards and Gianluca Zambrotta's sweet drive from distance was not too far over with New Zealand keeper Mark Paston beaten.
Riccardo Montolivo's 25-yard drive hit the inside of the post and bounced to safety before referee Carlos Batres from Guatemala awarded Italy a penalty after young Ipswich defender Tommy Smith tugged the jersey of Daniele De Rossi.
Iaquinta calmly sent Paston the wrong way to put the world champions on level terms and they immediately pressed for a second as a fierce long-range strike from De Rossi was fumbled by Paston.
Coach Marcello Lippi made a double change at half-time with Antonio Di Natale and Mauro Camoranesi coming on and soon Paston pushed away a great strike from an acute angle from the former.
But for all of their territorial dominance, Italy struggled to carve out clear cut chances and they were given a scare as Ivan Vicelich whistled a volley past the post. The 64th minute effort being New Zealand's first since the goal.
Paston then made a fine save to turn away Montolivo's thunderbolt from 25 yards but incredibly it was the Kiwis who came closest to a winner as sub Chris Wood flicked the ball past veteran Cannavaro and the West Brom teenager saw his diagonal drive fly narrowly past the far post.
Camoranesi saw a blast from distance pushed behind by Wellington Phoenix custodian Paston, diving away to his left, as the All Whites continued to resist.
And man-of-the-match Nelsen saved his best for last as he made a crucial block after Zambrotta cut inside Smith and unleashed a goalbound shot from close range.
New Zealand celebrated wildly at the final whistle and although Italy remain winless in five successive matches for the first time since 1997, they will still reach the second round with victory over Slovakia on Thursday.
Match Facts
Italy v New Zealand
Goals 1-1
1st Half Goals 1-1
Shots on Target 5-1
Shots off Target 12-2
Blocked Shots 6-0
Corners 15-0
Fouls 12-24
Offsides 1-2
Yellow Cards 0-3
Red Cards 0-0
Passing Success 82.5%-66.4%
Tackles 13-14
Tackles Success 76.9%-57.1%
Possession 71.6%-28.4%
Territorial Advantage 61.9%-38.1%
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