Balotelli, who had converted all 21 of his previous penalties in official matches, watched his run come to an end when Napoli goalkeeper Pepe Reina dived low to his right to keep out his effort just after the hour.
In a typically eventful performance, "Supermario" was also booked, hit the crossbar, had another penalty appeal turned down and brought the game to life with a brilliant stoppage time goal.
The defeat, Milan's first at home in the league since November and their first at home to Napoli since April 1986, left the hosts with a miserly four points from four games. Their poor start is almost certain to lead to renewed speculation over the future of coach Massimiliano Allegri.
Napoli, who have won all four Serie A games so far this season, went ahead in the sixth minute through Miguel Britos and Gonzalo Higuain made it 2-0 with a low, 25-metre shot which slipped through Christian Abbiati's hands in the 53rd minute.
Injury-hit Milan, who scrambled a 2-0 Champions League win over Celtic on Wednesday, produced another disjointed performance but had a golden chance to reduce the arrears when Balotelli was fouled in the area, only for Reina to save the penalty.
Balotelli, 23, then smashed another effort against the crossbar after a one-two with Alessandro Matri, saw a dipping 25-metre effort turned over by Reina and went down again in the area, only for the referee to wave play-on.
But he still gave Milan hope with he curled the ball in from the edge of the area in the 91st minute.
He finished his evening by getting into an angry exchange with Napoli's Valon Behrami and remonstrating with the referee.