The samba kings devastated their arch-rivals with three goals in an eight-minute spell with Sevilla striker Luis Fabiano bagging a brace and Liverpool defender Andrea Dossena scoring an own goal.
It was the first time Italy has conceded three goals before half-time since 1957 and with USA recording a shock 3-0 win over Egypt in Rustenberg, Italy missed out on making the semi-finals on goal difference. By topping Group B, Brazil avoid Spain and play South Africa on Thursday for a place in the final after the hosts finished runner-up in Group A. The United States take on the European champions on Wednesday.
"We still have a lot to improve on," said Dunga. "We have players of great technical abilities and the more we work together the more we can grow, but we are on the right track.
"We showed against Italy that we were superior in all aspects of the game. We beat the world champions and we did it in an efficient way."
Italy's aging team has failed to shine here and coach Marcello Lippi is sure to face stinging criticism back home where he has been slammed for failing to make better use of his younger players. Despite all the teams here being in the same boat, he blamed the long season for their below-par performances.
"Frankly I didn't think our condition was brilliant when we first showed up. I hoped the physical ability of the players would grow but we going home," he said.
"We are disappointed with our performance and we are very much aware of that. This does not reflect the way we usually perform. We were certainly not at our best in this championship."
An apathetic Italy slumped to a shock 1-0 defeat against Egypt in their last group game and Lippi made four changes to try and reverse the slide. Out went Fabio Grosso, Gennaro Gattuso, Giuseppe Rossi and Fabio Quagliarella and in came Andrea Dossena, Riccardo Montolivo, Luca Toni and Mauro Camoranesi.
But it made little difference against a Brazilian team that took full advantage of Italy's defensive frailties. They were dangerous from the outset with Italy fortunate not to go behind after six minutes when Ramires hit the angle between the post and the crossbar after being put through by Fabiano.
The breakthrough came eight minutes before half-time when Fabiano pounced on a scuffed shot from Maicon to drive the ball beyond Buffon's reach. They doubled their lead six minutes later when Robinho and Kaka combined to feed Fabiano who made no mistake from close range. With Italy on the ropes, Brazil delivered a knockout punch two minutes later after Robinho broke down the left and delivered a cross with Dossena turning the ball into his own net under pressure.