Losses from Eni's gas and refining business contributed to a 10 percent drop in fourth-quarter profits, the company reported Wednesday.
Eni, Italy's largest natural gas and oil company, said net profit was euro1.5 billion ($2 billion), compared with euro1.9 billion a year earlier. The lower earns were despite higher oil prices.
The company also said it has reached 80 percent of normal output in Libya, which was halted in the first quarter of 2011 by armed conflict. Full production is expected by the second half of the year.
Eni chief executive Paolo Scaroni said the financial crisis in Europe, particularly Eni's main Italian market, hurt results in its gas, refining and petrochemical businesses. The company forecasts 2012 to be "challenging" due to the ongoing crisis and volatile market conditions.
Shares in Eni were trading up 0.52 percent at euro17.47 on the Milan Stock Exchange.
The Italian government has announced measures this year to force Eni to sell its 50 percent stake, valued at euro6 billion, in Snam Rete Gas, SpA, as a way of opening up competition.
Eni, based in Rome, reported that full-year earnings were up 2 percent to euro7 billion.
Oil and gas production were down 14 percent in the quarter to 1.68 million barrels of oil equivalent a day, due to the near shutdown of Libyan operations.
The Greenstream pipeline, which brings natural gas to Italy, was closed for six months. Production gradually increased from 50,000 barrels of oil equivalent a day in the third quarter, to 160,000 a day in the fourth quarter.
Eni's prewar Libyan gas and oil operations produced 280,000 barrels of oil equivalent a day. Production is currently 240,000 barrels a day.
Natural gas sales were down 11 percent in the quarter to 25.5 billion cubic meters due to weak demand and higher competition driven by increased supply, the company said.
Eni announced a number of significant discoveries in 2011, including the Mamba gas discovery in Mozambique, which Eni says has exceeded expectations and will help Eni grow in Asia, as well as finds in the Barents Sea, Angola and Southeast Pacific.
Eni has proposed a cash dividend of euro1.04 a share.