The proposal by Austria's ruling conservative and far-right coalition "deteriorates the climate of mutual serenity and trust, which make up the essential foundations for the success of this type of meeting," the office of Enzo Moavero Milanesi said in a statement.
It denounced Austria's "anachronistic desire for revenge" in light of this year's centennial anniversary of the end of World War I.
The mountainous region of South Tyrol, also known by its Italian name Alto Adige, was part of the Austrian-Hungarian empire before being annexed by Italy as an autonomous province after World War I. Some 70 percent of locals said they were German speakers in the last census carried out in 2011.
South Tyrol's status has been a point of contention for decades.
The latest spat erupted earlier this month when Rome said Vienna had confirmed the creation of a special commission to prepare a draft law for the dual nationality proposal.
Italy had called the plan "inappropriate because of its potentially disturbing consequences".
"It is particularly bizarre that the Austrian government, which holds the EU presidency, promotes law projects that stoke discord instead of focusing on initiatives that unite," the foreign ministry said on September 7th.