The unemployment rate was 0.5 percentage points lower than in June and 0.9 percentage points lower than in July last year.
Italy’s jobless rate has fluctuated over the past few years as the country struggles to recover from a long recession, with the rate hitting an all-time high of 13 percent in November last year.
The last lowest point - also 12 percent - was in July 2013.
The rate of unemployment among 15 to 24 year olds also fell to 40.5 percent in July – down 2.5 percent percentage points on June, Istat said.
The number of people in jobs in July – 22.4 million – was 0.2 percent higher with respect to June.
Istat also revised up the growth rate in the second quarter from 0.2 percent to 0.3 percent.
The first quarter growth rate was always revised higher from 0.3 percent to 0.4 percent, which was Italy's first positive quarter after three years of recession and the highest rate since 2011.
Italy’s premier Matteo Renzi said in the video message below, posted on YouTube, that the dip in unemployment was among the positive signs that Italy is “getting back into gear”.
He also pointed to the record summer for domestic tourism as well as revenues generated by the Expo in Milan as further indication that Italy is on the road to recovery.
Economic Minister Pier Carlo Padoan also said on Twitter: "The economy is growing, unemployment is dropping... Now we need to consolidate and accelerate but we're going in the right direction."
Renzi's government has forecast an annual increase in GDP for 2015 of 0.7 percent.
"Italy is starting to reap the first rewards of the Renzi labour market reforms," said Berenberg analyst Holger Schmieding.
The head of Italy's business association Confindustria, Giorgio Squinzi, however warned that "while they are certainly positive figures... growth of 0.3 percent is not enough".
Italy has struggled to pull out of its longest post-war recession, after the economy contracted following the financial crisis.