Martin of Lachine, Que., and Lessard of Lasalle, Que., fell 21-12, 23-25, 15-10 to Greta Cicolari and Marta Menegatti to finish winless through three round-robin matches.
Canada had reason to hope for an upset after saving four match points and winning the second set.
"After the second set we were like 'Oh my god, this is the sixth best team in the world,'" said Martin.
But Canada failed to put up a successful block, while Italy had five and also out-digged their opponents 27-20.
"They countered one of my favourite shots. They wouldn't let me run away with it," said Martin.
Cicolari and Menegatti topped Pool F with three wins to move onto the next round. Cicolari said the Canadians startled Italy in the second set.
"Maybe we didn't realize it was important as we were first in the pool and perhaps we got too relaxed, over-confident," she said. "They are good players and you have to be a good team to get this far."