Police were reported to have opened fire on a group of at least 1,000 demonstrators trying to storm the consulate, the only Western diplomatic mission in the north-eastern port city of Benghazi.
Last night, the streets surrounding the consulate had erupted with violent protesters burning Danish flags - they had broken through police ranks and set fire to the first floor of the building and a dozen vehicles.
Libyan state television showed a part of the consulate building on fire, and firefighters trying to extinguish it. The Italian Foreign Ministry confirmed that the first floor of the building had been set on fire after the crowd charged into the grounds of the consulate. In a statement in Rome, the ministry said the consulate was being protected by Libyan security forces.
Police fired shots to try to disperse the crowd, the officials said.
Antonio Simoes-Concalves, a consular official, said that at least 10 protesters had been killed and 55 injured. A Libyan government statement confirmed there had been at least one death but refused to give any more information out.
A Libyan government statement said: "The protest was an irresponsible action which does not express the civilised behaviour of the Libyan people."
Mr Simoes-Concalves said, from inside the consulate as it was being attacked: "They are still continually firing. They haven't managed to block the protesters from here.
According to some reports, the rioters had also been upset by recent remarks, deemed to be anti-Islamic, by the Italian minister Roberto Calderoli.
Mr Calderoli, of the anti-immigrant Northern League party, said that he would start wearing a T-shirt bearing the controversial cartoons, which were first printed by a Danish newspaper. Prime Minister Silvio Berlusconi has called for his resignation.
The protests started at about 5pm Libyan time yesterday and continued for several hours. There were no reports of Italians inside being injured, the Italian Foreign Ministry said.
Mr Simoes-Concalves said that riot police had tried to prevent protesters from entering the ground of the building by firing tear gas but had failed and that some had then opened fire as the assault grew violent.
Italy's ambassador to Libya in Tripoli met late yesterday with the Libyan interior minister "who expressed the condemnation of his government for the acts of violence occurring in Benghazi," the Italian Foreign Ministry said.
Yesterday, riots continued to erupt in Muslim countries around the world - still fuelled by the anger about the 12 cartoons of the Prophet Mohamed
In Tanzania 10,000 people took part in a peaceful march through the capital Dar es Salaam, although some demonstrators carried placards reading, "We must kill those that insult Prophet Mohammed"
There have also been violent demonstrations in Lebanon, Pakistan, India, Indonesia, Afghanistan and several other Muslim countries, leaving at least a dozen people dead.
A Pakistani cleric, Mohammed Yousaf Qureshi, announced a $1m (570,000) bounty for the killing of the cartoonist who drew the offending caricatures.
However, he did not name the cartoonist and seemed to be unaware that 12 different people had drawn the pictures.
He said: "This is a unanimous decision by all imams of Islam that whoever insults the Prophet deserves to be killed and whoever will take this insulting man to his end will get this prize."
Muslims in the Gulf region have also recently intensified their boycott of Danish goods as the uproar raged on.