The proposals aimed to speed up cross-border cases
Italy refused to compromise its demand to limit the proposed warrant to a few offences, rather than the long list demanded by other countries.
"There will be no agreement today. The Italians will not change their position," an EU diplomat told the Reuters agency.
The issue is now likely to remain on the agenda at next week's Laeken summit - an embarrassment for the EU which was keen to show it could act decisively when faced with an international crisis.
Italian demands
The proposed list of around 30 offences to be covered by the new arrest warrant included terrorism, murder, corruption, fraud, hostage-taking and racism.
Italy demands a much shorter list, covering only selected crimes such as terrorism and organised crime.
But Spain and the UK - both of which suffer from domestic terrorism - are keen to have a far-reaching agreement.
The UK Government suffered its own defeat on Thursday when its own, even tougher anti-terror measures were defeated in a debate in the upper house, the House of Lords.
The 15 EU states did, however, succeed in agreeing a common definition of terrorism - an issue which had previously been a stumbling block.
An offence amounts to terrorism, they agreed, if a specified list of crimes is "intentionally committed by individuals or groups against one or more countries, their institutions or people, intimidating them, aimed at seriously altering or destroying their political, economic or social structures."
Bureaucracy
The proposed warrant was aimed at overcoming the tortuous bureaucracy which often delays cross-border cases by years.
But civil rights activists complained that, under the proposals, EU police would have excessive powers to crack down on legitimate protesters, particularly the anti-globalisation movement.
On top of Italy's objections, the proposals were threatened by the constitutions of Austria and Portugal, which prevent them from extraditing their own citizens to other countries.
This could prevent the laws from ever reaching their statute books.