The cut is equivalent to 0.2 percent of GDP and will include measures to fight tax evasion and reduce public spending, though there will be no tax increases, Gentiloni said after a cabinet meeting.
Rome also adjusted its 2017 targets to seek growth of 1.1 percent, up from 1.0 percent previously, following growth in 2016 of 0.9 percent.
The European Commission had in mid-January written a letter to Rome demanding that it go back to its 2017 budget and shave off 3.4 billion euros ($3.6 billion) under the threat of penalties.
The 2017 Italian budget adopted last autumn had forecast a deficit of 2.3 percent of GDP - significantly higher than the 1.8 percent initially demanded by Brussels.
"The deficit-to-GDP ratio will be reduced to 2.1 percent this year," Gentiloni pledged.
"Our forecasts are cautious and it has often turned out in recent years that they are corrected positively afterwards."
Italy has the second highest public debt of any EU country, equivalent to 133 percent of its GDP in 2016.
It was one of eight eurozone countries warned in November that they could face fines and restricted access to funds from Brussels over their failure to stick to the EU's Stability Pact rules.