The Squadra Azzurra looked a shadow of the side who had defeated England in their opening game, going down 1-0 to a Costa Rica side who confirmed their 3-1 opening victory against Uruguay was anything but a fluke.
As a result, Italy need a draw or win against Uruguay to join the Central Americans in the knockout stage.
To get the result they need, Prandelli admitted they are going to have to be sharper than they were in Recife on Friday night.
"It's a deserved defeat -- they were more aggressive than us," he told Italy's RAI television.
"They kept hitting us on the break. We knew it was going to be a very tough group and now we've got to try to get all our energy back and play for everything against Uruguay."
He added at his news conference: "We came onto the pitch with too slow a pace. Our approach was not the best. We tried to think of engaging one on one on the outside, but we were never able to free up our players. We have to think of recovering our energy because we have to play again against Uruguay.
"Physically speaking, Costa Rica did very well. It should be a stimulus and incentive for us to play better. They have the capability of attacking empty space. We were too slow. After the goal, we weren't able to come back, so congratulations to Costa Rica."
That game will now be a winner-takes-all encounter, with Costa Rica already assured of their place in the last 16, and England eliminated.
All eyes will be on the Azzurri's clash with Uruguay in Natal, and Prandelli says he is confident his team are mentally strong enough to win but is concerned about their fitness.
"No, we've got absolutely no fear," he said. "We just need to regain our energy, that's all. We couldn't get the ball forward to Mario Balotelli often enough, but it's a deserved defeat."
In his postmatch news conference Prandelli talked about a need for Italy to show more quality and a greater desire in their third Group D game and offered no excuses for the defeat.
He said: "Right now we have to try to solve our problems, which are not huge but are pretty clear to me.
"The problem is that we must exclusively think about trying to regain the ball as soon as possible. Our team is not as explosive as Costa Rica and we have to have all 10 players trying to regain the ball.
"The opponents were good at closing down our initiatives. I think we could have shown more quality. We know about the calendar and the schedule. It's useless to find excuses about the heat or the schedule.
"I saw a lot of players that were pretty tired. If you find a team that is athletically fresh and better than you in this regard, you have to have more order.
"Amongst the problems that we need to address quickly, we have to maintain better order so that we can allocate our strength and forces better. Costa Rica worked hard to get to this World Cup. They're in top condition and it's not a surprise to me that they're doing well."
Antonio Cassano made his first appearance at the World Cup as a second-half substitute, but the Parma forward was unable to provide any more verve to the Italy attack. However, he has no doubts they will get it right on Tuesday.
"We just need to get our energy back now, but I'm convinced we'll play a great game against Uruguay," he told Sky Sport Italia. "I know we can do it. We need one great game, and we will deliver. If we recover all of our energy, we can make it, no worries."
Prandelli: We were too slow
Italian manager Cesare Prandelli spoke to the press following his side's 1-nil loss to Costa Rica and noted that his side was not prepared.
Costa Rica topple Italy
The ESPN FC panel weigh in on Costa Rica's impressive victory over Italy, which puts immense pressure on Uruguay and Italy's hopes to advance.