Rogers and Dalhausser lost the first set 21-17 and fell behind 12-7 in the second. The Americans tied it 19-all but lost the final two points and were eliminated when Rogers' spike was blocked right back into him by Nicolai.
Although the Italians were one of the last teams to qualify for the London Games, it was the third time they have beaten Rogers and Dalhausser.
"We've won two times against them, but everything is a battle," Nicolai said. "They are the best team in the world, I am sure. If we play in another match, they can win the gold medal."
It didn't take long for the defeat to hit home with the Americans, who had been among the favourites to win gold.
"It's a little bit different when you win: It takes about a month for it to sink in," Dalhausser said after the defeat in the round of 16 at Horse Guards Parade. "When you lose, it smacks you right in the face the second the ball hits the sand."
The Italians went 1-2 in the preliminary round, losing not only to top-seeded Emanuel and Alison of Brazil but also an Austrian team that did not make the medal round. That forced Italy to play a lucky loser match on Friday night; they beat Canada to earn a matchup with the defending champions.
It turned out, that was bad luck for the Americans, who finished the pool play unbeaten: The combination of 1.83-meter (6-foot-8) Nicolai blocking at the net and Lupo chasing down balls behind him is a mirror image of the U.S. pair.
"People say 'They're the young Phil and Todd,'" Rogers said. "I guess they 'Phil and Todded' us to death."
Rogers has always been a cerebral player — his nickname is "The Professor" and his Twitter handle is (at)professortodd. It's a sense he's developed over more than a decade on the world's beaches.
But Lupo, who just turned 21, proved every bit as cagey.
"You don't see many 21-year-olds with Todd's type of game," Dalhausser said. "They're basically the younger version of us."
Italy has never won a medal in men's or women's beach volleyball, a sport that has been dominated by the Brazilians and the Americans since it became an Olympic sport in 1996. This team, which came together only in 2011, was 15th of the 16 teams that qualified for the 2012 Games through the FIVB point system, not clinching their berth until the final qualification tournament.
But they have had success against Rogers and Dalhausser, a team they're hoping to replace atop the medal podium.
"We hope so. For me, it's a dream to be like Phil and Todd," Nicolai said. "For me, they are like an idol. It's strange to beat them at the Olympics. I don't know how to react."
Earlier Friday, Americans Jennifer Kessy and April Ross beat Switzerland's Simone Kuhn and Nadine Zumkehr to advance to the quarterfinals of the women's tournament. Top-seeded Juliana and Larissa also advanced, eliminating the Netherlands 21-10, 21-17, and Laura Ludwig and Sara Goller beat fellow Germans Katrin Holtwick and Ilka Semmler 21-16, 21-15.
The men's and women's round of 16 continued later Friday and Saturday.
Mariusz Prudel and Grzegorz Fijalek of Poland also advanced in the first round of knockout play, beating Sascha Heyer and Seba Chevallier of Switzerland 21-18, 21-17. Martins Plavins and Janis Smedins of Latvia beat Martin Spinnangr and Tarjei Viken Skarlund of Norway, 21-18, 21-16.