Eastern Region clubs qualified for the tournament following a two-legged play-off victory over Western Region earlier this year.
Manager Harry McConkey selected eighteen players from Eastern Region for Group 6, which is being contested in Albania.
The match took place at Stadiumi Luz i Vogël in Kavaje Municipality with weather conditions described as stormy by officials present on the pitch.
Filippo Comino scored for Piemonte Valle d'Aosta Regional FA within two minutes of kick-off to put Italy ahead.
Northern Ireland defender Leon Lavery created a chance but failed to convert his shot on target during the opening period.
Substitute Curtis Brown added another opportunity via a free-kick from Donnelly, though the effort was cleared for a corner kick.
McConkey introduced five changes to the starting eleven before the match began against Piemonte Valle d'Aosta Regional FA in game one.
Northern Ireland took the lead after just five minutes of play despite the early concession.
Midfielder Charlie Dornan completed the scoring on the thirty-ninth minute to stretch their deficit to one goal.
The second half saw both sides struggle for possession as the match became increasingly scrappy in nature.
Italy's Giovanni Specchia and Nicolo Poppa also registered chances before halftime but could not add to their advantage.
Northern Ireland continued to press forward in search of an equaliser during the closing stages of the contest.
Despite pushing hard, the Italian defence held firm to preserve their two-goal lead until full time.
The result marks a narrow defeat for Northern Ireland's junior international team in this regional competition.
Eastern Region players represented Northern Ireland throughout the tournament despite the early numerical disadvantage.
No further details were provided regarding specific disciplinary actions or future squad selections by the Irish Football Association.