In Italy, as in most of  Western Europe, the official currency is the Euro (€).   The Euro is divided into 100 cents (centimes, centesimi), with two decimals after the comma. So, a price will often be displayed as €10,00 (ten euros); or €2,14 (two euro and 14 cents), etc.

For visitors from the United States, it is easy to make a conversion: 1 Euro is, right now, about $1.39.  (Rates of exchange fluctuate constantly, so check carefully the rate before changing your money on www.oanda.com or www.xe.com).  This rate of exchange means for example that when you enjoy a wonderful Italian Pizza, and you are charged say 15 Euro, you will pay 15 times 1.39 = $20.88.  To make things a bit simpler, consider that 3 Euro equal approx. $ 4.

Euro paper money comes into different colors and sizes depending on the face value.  500 Euro bills are violet, 200 Euro ones are yellow, 100 Euro bills are green, 50 are orange, 20 are blue, 10 are red(dish) and 5 are grey(ish). Consider that small denomination Euro bills are a little smaller than a dollar bill. There are also coins: 2 and 1 Euro (both are made with two different metals - golden and silver - and the value is printed big on one side), 50, 20, 10 cents (golden material) and 5, 2 and 1 cents (bronze material). The bigger coin has bigger value... the 1 cent coin is very small.

Changing money into Euro: it is expensive to change foreign currency in Italy, exchange bureau fees are high. Banks will only exchage currency for their own customers. Paying with travellers cheques is no longer accepted and they are almost impossible to change. If you do find somewhere that will change them, expect to pay very high fees. 

Cash and Change Storefronts

Be particularly careful when using these commercial Cambio/Change operations as the exchange rate is not clearly posted for smaller transactions. Particularly at Tourist spots like the North side, the foot at the The Ponte Vecchohio . The Change storefront there will charge 19.9% unless a price is negotitated before hand. Shop around and be careful !

This may not be a problem anywhere else. Travelers state that other places in Florence, Every place in Rome, and Venice are easy and fair.

Credit Cards / Debit Cards / ATMs

Major establishments accept credit cards whose logos are posted in their front windows, just as they do in the USA and Canada.  You should check with your credit card company to see if they charge you an international transaction fee or foreign transaction fee.  Visa and MasterCard charge a processing fee on international transactions, and most card-issuing banks add their own fees on top of that.  They equal to generally a percentage of your overall purchase price, sometimes as high as 3% extra. 

Beware that taxis can often be paid with cash (euro) only!  In reality, some taxis accept plastic, (in Rome, for example, there is one company with all taxis taking C/C) but since the driver must pay a 3% commission to the bank, they prefer cash payments. 

ATMs (Automatic Teller Machines) in Italy are known as Bancomat, and can be found anywhere in large cities as well as in small towns. The machine operates just as ATMs do anywhere else; at the beginning of the transaction, it prompts the user for the preferred language.

Using a credit card, or even better, a debit card or your local bank (ATM) card is very easy. One must first locate either the Cirrus, Plus, VPay, or BankMate symbol (on the Bancomat and on your card), to ensure the card is usable at that particular unit.  If you are unsure about the compatibility or the banking systems, contact your credit card company or local bank. After discovering the system is compatible, simply withdraw money as you would at home. Of course, in Italy the money will be dispensed in Euro, but when you return home, your bank will have converted the amount of your withdrawal into dollars using the most beneficial exchange rate possible. Be careful though when using credit cards, as many  banks are now charging large fees of 2.5% to 4% for cash advances -- which wipes out the advantage of using the Bancomat in the first place. One's best bet is to use your regular ATM card and simply withdraw money from your account just as you would do at your local bank. Pay attention: your bank account may have daily withdrawal limits, e.g. $300, therefore, you have to account for the currency conversion when withdrawing euro in Italy. ATM card holders from other countries may check the equivalent withdrawal limit set by their home bank. Italian ATMs/Bancomats limit pin numbers to four digits. Your bank will also apply a hefty International Transaction Fee. Some waive this fee if you go to their "Correspondent Bank". For instance, the Bank of America Correspondent Bank in Italy is Banca Nazionale del Lavoro or BNL. Otherwise you end up paying $8.00 at least PER WITHDRAWAL over and above any other fees applied.

Be very carfeful with debit cards in banco mats in Italy. They can be cloned (a skimmer skims the card and a mini camera watches you enter the pin then someone in Malaysia takes all your money). Given that many travel insurance covers travellers for $1000 in cash but do not insure for electronic fraud perhaps it is better to still carry a wad of cash and avoid using bancomat's too often.

ATMs at Airports  

There are ATMs at all Italian airports. However, it is wise to have a little cash in Euro on hand when you land.  Sometimes, the airport ATMs might be empty when you land, or if you land on a Saturday or Sunday, the machines might not be scheduled for refill until Monday, which would put you in a bind as you will need some money to proceed to your onward destination by train, taxi, etc.

ATM locator

The Italian Banking Association has  an efficient ATM locator on its website at http://faro.pattichiari.it/index1.phtml

*NOTE-Several comments have indicated that this link doesn't work-September 2013

Although it's in Italian only, it's very easy to use:

1) Enter the name of the town under "Localita'"

2) Enter the name of the bank which issued your card under "Banca" (even if it's a non-Italian bank, doesn't matter) - Ignore all other fields

3) Click on "Cerca sportelli"

On the next screen you'll see a map with the location of ATM's in the desired town along with names of banks, addresses, etc.

You can obtain the same information also by calling (from inside Italy) 800 002 266 (toll-free), but the service is in Italian only.