The fall in the retail index in the eurozone's third-biggest economy was the worst since 1990, when the National Institute of Statistics data collection began.
Christmas shopping failed to galvanize consumers, with non-food sales dropping in December by 0.3 percent from a month earlier and food sales down 0.5 percent according to the seasonally-adjusted data.
Consumers are suffering from increased taxes and unemployment.
Italy began shaking off its longest recession since the Second World War in the fourth quarter with a preliminary estimate showing growth of 0.1 percent, but the turn-around has done little to boost consumer spirits.
The government has said it is hoping for growth of around 1.0 percent this year and the Bank of Italy is predicting a 0.7-percent result but the International Monetary Fund is predicting only 0.6 percent growth.
The disappointing retail results came as new prime minister Matteo Renzi – who has vowed to tackle the labour market and boost growth – prepared to put his coalition to a vote in the lower house of parliament.
After an initial positive reaction among investors to the new premier, who was sworn in on Saturday, Milan's FTSE Mib index was down 0.33 percent on Tuesday.
SEE ALSO: Italy's economic recovery gets underway
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