Riccardo Montolivo was shown a red card with 10 minutes of extra time remaining, but despite their numerical disadvantage, Italy held on to force a shootout, where they prevailed 3-2.
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Nervousness appeared to be on display early in the match and the opening 15 minutes brought a couple of half-chances for either side.
Diamanti was next to come close for the Italians with a driven effort that whizzed just wide from an acute angle.
Diamanti was involved again moments later as Italy took the lead. The Bologna midfielder's free kick crashed off the crossbar and Astori turned the rebound into the back of the net from just yards out.
Luis Suarez almost levelled just before the half-hour mark, but his powerful effort was blocked by Buffon.
Cavani did find the back of the net with a header for Uruguay in the latter stages of the half, but the Napoli striker was correctly ruled offside.
However, Cavani was not to be denied just before the hour mark when he collected a clever pass from Walter Gargano and finished expertly into the bottom corner.
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Forlan twice came close to sending Uruguay into the lead on 68 minutes, but Buffon was on hand to deny the former Manchester United man with a double save.
Buffon was called into action again moments later to deny a powerful strike from Alvaro Gonzalez with another impressive save.
Despite persistent pressure from Uruguay, Italy regained the lead on 73 minutes when Diamanti curled an unstoppable free kick into the top corner.
The Azzurri's lead lasted only five minutes, though, as Cavani responded in kind by dispatching a stunning 30-yard free kick beyond Buffon's despairing dive to force extra time.
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With Italy seemingly suffering from fatigue following Thursday's energy-sapping defeat to Spain in the semi-finals, it was Uruguay who looked the more likely side to find a fifth and decisive goal.
The South Americans' dominance increased further midway through the second period of overtime when Montolivo was sent down the tunnel for picking up a second yellow card.
Suarez and Cavani both came very close to netting a winner, but Italy desperately hung on to ensure that the match would be decided by a penalty shootout.
Forlan, who missed a penalty in Uruguay's semi-final defeat to Brazil, failed to convert from 12 yards again, as Buffon made an important save to hand Italy the momentum in the shootout.
Alberto Aquilani, Stephan El Shaarawy, Cavani and Suarez made no mistakes with their spot kicks, but Mattia De Sciglio, Martin Caceres and Gargano saw their efforts saved, meaning that Italy emerged victorious.