Italy striker Christian Vieri had a goal disallowed for offside before heading his side into the lead after 55 minutes.
However, unfancied Croatia scored twice in four minutes to turn the game on its head to leave Italy fuming, particularly when the officials again intervened to deny them a late equaliser.
They were village referees
Italian striker Christian Vieri
A long-free-kick found its way into the Croatia net only for striker Filippo Inzaghi to be penalised for shirt-pulling.
"We knew it was a competitive game," said Italian coach Giovanni Trapattoni.
"It was an intense game... these things happen and the important thing is not to get demoralised. I don't want to get into judging.
"But I thought that one of the goals - or even both goals - that were disallowed were okay. I think a draw would have been a good result."
Vieri was more scathing of match referee Graham Poll and his assistant referees.
Vieri said: "Those weren't division one or even division two referees, they were village referees. Now we absolutely must win against Mexico."
The Italian press were quick to point the finger of blame at the officials as well.
"There seemed nothing wrong about the two disallowed goals - it was a jinxed game," the Gazzetta dello Sport newspaper said.
The La Republica newspaper agreed, but also blamed the team for an uninspired performance.
"It is not the fault of the magnificent duo [Vieri and Francesco Totti] that their class alone is having to carry this team.
"This defeat did away with the illusion that you only need to turn on the light momentarily to be able to smile for 90 minutes.
"Now we will have to wait and suffer until the decisive game with Mexico - precisely what we all wanted to avoid."