Despite his calls for unity, lawmakers from three parties boycotted the vote: the powerful 5 Star Movement; the centre-right Forza Italia and the far-right Liga.
Foreign Minister Luigi Di Maio said in a tweet that these developments represent a “black page for Italy”.
“On this crazy day, Parliament decides to move against Italy,” he wrote on Twitter.
Earlier Wednesday, Draghi asked lawmakers to support a coalition government to avoid early elections.
“We need a new pact of trust, sincere and concrete, like the one that has allowed us to change the country for the better so far,” he said.
“If we still want to stay together, the only way is to restore this pact (of national unity) with courage, altruism and trust,” added the former head of the European Central Bank.
Another former prime minister, Matteo Renzi, thanked Draghi for his efforts after the vote.
“As I said in the Senate, from tomorrow everything will not be the same again,” he wrote. “I am proud that I wanted this in spite of everything and everyone. I am proud to have supported him even today.”
Draghi resigned last week after the 5 Star Movement, the largest party in the country’s coalition government, withdrew its support in a parliamentary vote of confidence in a package designed to tackle Italy’s cost-of-living crisis.
He has previously stated that he will not lead a government that does not include 5 stars.
However, Draghi’s resignation was rejected by Italian President Sergio Mattarella, who urged him to stay and find a solution.
This is breaking news and will be updated.