The country has failed to complete the European Directive by offering "fair and adequate" compensation to victims of violent crimes, judges in Luxembourg said on Tuesday.
According to an EU policy put in place 12 years ago, the compensation must be given to all EU citizens affected by violent crime, by the government of the country where the crime was committed - even if the victims are not from that country.
The law applied to any intentional violent crime, including bodily harm, sexual assault, violent robberies and murder, if the culprit is not identified or if they are unable to pay damages themselves.
In Italy, separate laws cover compensation for victims of terrorism or organized crime, but in other cases, damages are often only awarded when the victim earned less than €11,000 per year.
However, the judgement on Tuesday ruled that Italy needed to bring its policies in line with the European Directive, in order to avoid discriminating on the grounds of nationality applied to this law.
The court ruling has retroactive effect, so that victims who had previously been denied compensation could sue for damages.
Italy's Ministry of Justice responded to the ruling, saying it had made the "necessary changes" and was ready to "proceed promptly" with claims for compensation relating to crimes committed before the law came into force.