Alberto Gilardino headed the only goal as Italy won the bronze medal and ended Iraq's spectacular run of success in the men's football tournament.
The Parma striker, who netted 23 times in Serie A last season, scored the winner after just eight minutes.
The match was played in a sombre atmosphere following the killing of Italian journalist Enzo Baldoni by militants in Iraq on Thursday.
"We are not in the mood to enjoy our win," said Italy coach Claudio Gentile.
Adnan Hamad, the Iraqi coach who has performed wonders getting the team to the semi-finals after they had been unable to play on home turf for more than a year, said his players felt flat too.
"We share the feelings of our brothers and friends from Italy and we send our condolences to the family," he said through an interpreter.
The loss meant the Iraqis go home with nothing after becoming one of the success stories of the Games.
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To reach the semi-final is a big achievement for our team under our circumstances
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Iraq coach Adnan Hamad
They were unlucky not to draw level before half-time but Razzaq Farhan's left-foot shot was pushed around the post by goalkeeper Ivan Pelizzoli.
Qusai almost tied the score when the Italians lost the ball just outside their own area and he ran through to shoot over the top from 18 yards.
"We were better than the Italian team," Hamad said. "We missed a lot of chances to score and we were controlling the game.
"To reach the semi-final is a big achievement for our team under our circumstances. But we wanted to win the game and to have a bronze medal to bring happiness to our people."
Argentina tackle Paraguay in Saturday's gold medal match.