The Publicity Control Institute (IAP) jury said it considered the image infringed the IAP code of conduct and should not be used.
"The photo is shocking for everyone, particularly those who are sick and has been set up for commercial ends," IAP president Giorgio Floridia told AFP.
He was not a member of the jury which banned the image which was made for the No-l-Ita clothing chain. IAP decisions jury decisions have to be followed by all member organisations, including No-l-Ita.
Toscani, a multiple award winner, who has photographed death row prison inmates, dying AIDS victims and nuns kissing priests for adverts, has condemned the IAP's decision as "censorship".
He told the Corriere della Sera newspaper he would start legal action to seek damages.
France's advertising watchdog, the Advertising Verification Bureau (BVP) has already told French companies not to use the image produced by the veteran Toscani, who once stated "there's no such thing as going too far".