Italy is the first European country to adopt measures that can punish the California internet giant for collecting images for its popular Street View service that allows users to pan through neighbourhoods and individual addresses around the world.
Google's Street View cars, which travel through neighbourhoods with cameras mounted on their roofs, must be easily identifiable by signs and other means or risk a fine.
"Google cars will have to be clearly marked by means of visible stickers or signs to unambiguously signify that pictures are being taken for the purposes of Street View," the Rome-based Privacy Authority said in a statement.
"This decision...takes account of the many complaints lodged by citizens who did not wish to be displayed on the online pictures."
Google in response to the potential sanctions said that it has been conducting a "constant dialogue" with the Privacy Authority to protect personal information, countering that there "already exists numerous instruments that we use to inform citizens" of the presence of Street View cars.
The company has addressed previous worries by blurring out faces and license plates in its images. Italy's Privacy Authority in September reprimanded Google for allowing its Street View cars to intercept electronic information from wireless internet networks, although the company said it has never used the data.