The holders lost 3-2 to World Cup debutants Slovakia, who qualified for the last 16 with Paraguay from what had looked an easy-looking Group F for Italy.
"I take all responsibility. I haven't prepared this team well enough," an ashen-faced Lippi told a news conference without even being prompted by a question.
"I didn't think we could win the World Cup but I though we would do better."
In a strikingly honest assessment of what went wrong, Lippi pummelled himself verbally for 15 minutes.
"I failed to train the team well enough, they weren't ready for such an important match. For an hour and 15 minutes, for psychological reasons I think, nothing worked," he said.
The 62-year-old, a national hero when he led the Azzurri to 2006 World Cup glory, had already announced he would step down again after the finals. He will be replaced by Cesare Prandelli.
Lippi first quit straight after their triumph in Germany but returned in 2008 after Italy's disappointing European Championship campaign under Roberto Donadoni.
"I don't regret coming back, I came back with great enthusiasm," he added.
His stark words took some of the sting out of the Italian reporters who were waiting to savage a campaign that began with two 1-1 draws.
"I have no intention of getting straight back into coaching and training after this," added Lippi. "I'll take some months off and we will see."