Needing to win Saturday's fourth race at San Francisco Bay to keep the best-of-seven semi-final series going, Artemis made a great start, taking the early lead with their high-tech 72-foot catamaran.
But their joy was shortlived when they were penalized for touching the Italian boat during the pre-start.
Artemis were handed two more penalties for sailing out of bounds during the race, effectively ending their hopes of winning and allowing Luna Rossa to cruise to victory by two minutes and 11 seconds.
With the win, Luna Rossa advanced to the final of the Louis Vuitton Cup against Emirates Team New Zealand.
Their best-of-13 series, which will decide the challenger to compete against defending champion Oracle Team USA for the America's Cup, starts August 17.
The Kiwis easily defeated Luna Rossa in the round-robin preliminary series to go straight through to the final but Luna Rossa's helmsmen Chris Draper said the Italians were much better now.
"We've improved tons," Draper said.
For Artemis, Saturday's defeat marked the end of a tragic campaign, in which one of their crew members died. British Olympic gold medalist Andrew "Bart" Simpson was killed in a training accident on May 9.
Artemis were unable to compete in the round-robin stage and almost missed the entire event.
"It's been a terrible period for the team," Artemis skipper Iain Percy, Simpson's teammate and best friend, said.
"We knew what a huge achievement it was (just) to be out here."