"The president today took the decision to not agree to the extradition of Italian citizen Cesare Battisti on the basis of a report by the attorney general," said Brazil’s Foreign Minister Celso Amorium, announcing Lula’s decision in a prepared statement for reporters.
Battisti has been in jail in Brazil since 2007, pending the result of the Italian extradition request. Before he was caught, he spent three decades fleeing Italy's justice system in France and Mexico.
He was found guilty in Italy of the murder of a prison guard, a terrorism investigator, a butcher and a jeweller in 1978-1979 when he was part of the Armed Proletariat for Communism, an armed left-wing group. He was sentenced to life in prison, in absentia, in 1993.
Italy called Lula’s decision to refuse the extradition request "seriously offensive".
"The worst-case scenario has happened," Italy’s Defence Minister Ignazio La Russa
Told the ANSA news agency. He said Italy would "leave no stone unturned" until Brazil "backs down on this unjust and seriously offensive decision".
Brazil accused Italy of being "impertinent" for criticising the judgement of its head of state.
Battisti, who wrote crime novels while he lived in France, maintains his innocence on the murder charges, claiming he is the victim of persecution in Italy.
Last year, Lula’s government tried to declare Battisti a refugee, a move that was overturned by the Supreme Court, which said the crimes were not political in nature.
The head of Brazil’s Supreme Court, Cezar Peluso, said the he would verify the legality of Lula’s latest decision when the court resumes in February, after a recess.
The diplomatic row will be the first challenge for Lula’s successor, Dilma Rousseff, who takes over the presidency on Saturday, 1 January 2011.