Displaying all-too-familiar ill-discipline, the Wallabies slumped to a sixth defeat in their past eight Tests under Schmidt in another hammer blow ahead of next month's 2027 Rugby World Cup draw.
Ranked seventh in the world, the Wallabies will likely need to beat powerhouses Ireland and France in their remaining two spring tour fixtures to snatch an all-important top-six seeding for the global showpiece in Australia in two years' time.
Such a scenario looks improbable after Schmidt's men produced another insipid performance, a week after falling 25-7 to England at Twickenham.
The last time Australia lost to Italy, for a first time ever three years ago in Florence, fellow New Zealand coach Dave Rennie was sacked barely a month later.
Rugby Australia have already locked Les Kiss in to take over from Schmidt in mid-2026, leaving the Kiwi's fate safe, but not so his legacy.
Narrow wins over Argentina and Japan have been Australia's only two victories in eight Tests since the Wallabies' mighty triumph over the world champion Springboks at Ellis Park in August.
This year Australia also escaped with a last-gasp win over Fiji before a 2-1 series loss to the British and Irish Lions, leading to Schmidt's winning strike rate slumping to 42 per cent, among the worst Wallabies coaching returns in history.
"I'm pretty gutted, to be honest," Schmidt said after the Italy loss.
"I said progress isn't linear, but that was a flat performance. That's a dip we can't afford to have."
Skipper Harry Wilson was also unable to hide his anguish.
"We're hurting," he said.
"We wanted to fix up from last week. We said 'We're going to fix it up' and we didn't.
"We want to be a team which does what we said we're going to do, and we didn't do that tonight."
What the Wallabies haven't fixed in several seasons is discipline, with even Schmidt acknowledging it was tough to win, even against the 10th-ranked side in the world, while conceding 15 penalties and a yellow card.
Australia were leading 19-12 when code-hopping superstar Joseph-Aukuso Suaalii was sin-binned for a high tackle in the lead-up to Italy's match-levelling second-half try to Louis Lynagh, son of Australian legend Michael.
"We'll have a look at some of those penalties. Some of them we definitely have to sort out," Schmidt said.
"The yellow card, Joseph has to go lower. He can't afford to tackle up around (high). Even though the player is dropping, you can't take that risk. You've got to go low, so some of those penalties are definitely on us."
Carter Gordon endured an indifferent start back in the Australian No.10 jumper, kicking out on the full, losing a couple of high balls and having a pass knocked down.
But his midfield burst and lovely left-to-right long ball to Corey Toole finally put the Wallabies on the front foot before hooker Matt Faessler scored from a driving maul after 20 minutes.
After prop Angus Bell also touched down and Gordon bagged an opportunistic try, the Wallabies led 19-12.
But the lead didn't last long as first Lynagh crossed, then fellow Australia-eligible winger Monty Ioane, nephew of ex-Wallaby Digby, put Italy in front again.
This time there was no way back for the Wallabies.
Schmidt, though, insists there is a way forward.
"This low right now is tough, and what I would say to the players is one of the best things about the tour is that they do have a chance to turn things around next week," he said.
"All I can say to people is that we believe in what we can deliver. Don't lose faith because we will guarantee to keep working as hard as we can to try to demonstrate what it means to us to try to be as competitive as possible."
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