The Spaniard reached the end of the road on an emotional day in Malaga.
Rafa Nadal created moments of magic, but Botic Van de Zandschulp had the answers scoring a 6-4, 6-4 win in what may be the king of clay's final singles match.
Viktoria Hruncakova and Tereza Mihalikova swept Olivia Nicholls and Heather Watson 6-2, 6-2 clinching Slovakia's 2-1 semifinal win over Great Britain.
Iga Swiatek defeated Paolini in singles to force a deciding rubber, but Italy would not be denied.
The first American man to reach No.4 in over 17 years is hungry for more.
Even with retirement looming, Nadal remains all about the competition at Davis Cup.
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